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Published by:
German Solar Association – BSW-Solar / Bundesverband Solarwirtschaft e.V.
Lietzenburger Straße 53
10719 Berlin, Germany
E: info(at)bsw-solar.de
T: + 49 30 2977788-0
Fax: + 49 30 2977788-99
www.solarwirtschaft.de
Person responsible for content under §55 paragraph 2 RStV: David Wedepohl (BSW-Solar)
Funding by: Federal Foreign Office (www.diplo.de)
Project Number (Förderkennzeichen- FKZ): 2517AA0484
Design: BSW-Solar
Place and date of publication: Berlin, 23.08.2018
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Table of Contents Page
0. Executive Summary 11
1. Status of the Nigerian Power Sector 12
Power Market Policy 12 1.1
General Power Market Policy 12 1.1.1
Strategy and Plans 15 1.1.2
Electricity Generation 16 1.2
Status of Generation Capacities 16 1.2.1
On-grid power Generation 18 1.2.2
Off-Grid Power Generation 19 1.2.3
Electricity Consumption and Demand 20 1.3
Electricity Demand 20 1.3.1
Electricity Consumption 20 1.3.2
Power Outage Statistics 21 1.3.3
Transmission and Distribution Grid 23 1.4
Transmission Grid 23 1.4.1
Distribution Grid 23 1.4.2
Electrification 23 1.5
Electrification Rate 23 1.5.1
Grid Development Plans 26 1.5.2
Electricity Tariffs and Costs 26 1.6
Electricity Tariffs On-grid 26 1.6.1
Electricity Tariffs Off-grid and Diesel-based 27 1.6.2
National Stakeholders 28 1.7
2. Status of the Nigerian PV Sector 31
General Perception and Acceptance of PV 31 2.1
Regulatory and Business Framework 31 2.2
PV Regulations 32 2.2.1
Support Mechanisms 32 2.2.2
Codes and Standards 34 2.2.3
Financing Situation for PV Power Plants 36 2.2.4
Import conditions for PV 38 2.2.5
Security and Business Climate 39 2.2.6
Customer Segments for Solar PV 41 2.3
Industrial Clusters 42 2.3.1
Free Trade Zones 43 2.3.2
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Table of Contents Page
3. Selected PV Business Models 45
Large Scale PV (25 – 50 MWp) 45 3.1
Embedded PV systems (1 – 5 MWp) 49 3.2
Captive Diesel-PV hybrid (100 kWp – 1,5 MWp) 53 3.3
Off-Grid Generation 58 3.4
Solar Home Systems (SHS) 58 3.4.1
Off-Grid PV (10 – 250 kWp) 59 3.4.2
4. Success Factors for Developing PV Power Plants 63
Status and outlook on most profitable PV segments 63 4.1
Key requirements for successful implementation and operation of PV 4.2
plants 64
Optimum Power Plant and Project Design 65 4.2.1
Project Implementation 65 4.2.2
Commercial and Financing Aspects 66 4.2.3
PV Potential 67 4.3
Risk factors 68 4.4
Financial risk factors 68 4.4.1
Socio-political/geographical risk factors 68 4.4.2
Recommendations for Investors and EPCs 69 4.5
5. References 70
5
List of Figures
Figure 1: Power Generation Sites in Nigeria 17
Figure 2: Break-Down of On-Grid Licensed Power Generation in Nigeria, 2012 19
Figure 3: Total Electricity Consumption by Economic Sectors and Consumption Per
Capita for Nigeria and Peer Countries (2015) 21
Figure 4: Electricity Tariffs Off-grid and Diesel-based Projections 27
Figure 5: Project Overview - Large Scale PV 45
Figure 6: Equity Cash Flow - Large Scale PV 46
Figure 7: Project Cash Flows - Large Scale PV 46
Figure 8: Specific Yield Sensitivity - Large Scale PV 47
Figure 9: System Price Sensitivity - Large Scale PV 47
Figure 10: Interest Rate Sensitivity - Large Scale PV 48
Figure 11: PPA Price Escalation Sensitivity - Large Scale PV 48
Figure 12: Project Overview - Embedded PV 49
Figure 13: Equity Cash Flows - Embedded PV 50
Figure 14: Project Cash Flows - Embedded PV 51
Figure 15: Specific Yield Sensitivity - Embedded PV 51
Figure 16: System Price Sensitivity - Embedded PV 52
Figure 17: Electricity Price Escalation Sensitivity - Embedded PV 52
Figure 18: Interest Rate Sensitivity - Embedded PV 53
Figure 19: Schematic view of a PV / diesel hybrid system for rural electrification 54
Figure 20: Project Overview - Captive PV 54
Figure 21: Equity Cash Flows - Captive PV 55
Figure 22: Project Cash Flows - Captive PV 55
Figure 23: Specific Yield Sensitivity - Captive PV 56
Figure 24: System Price Sensitivity - Captive PV 56
Figure 25: Fuel Cost Escalation Sensitivity - Captive PV 57
Figure 26: Interest Rate Sensitivity - Captive PV 57
Figure 27: Typical Load Profile in Rural Areas 58
Figure 28: Project Overview - Off-grid PV Mini Grid 59
Figure 29: Equity Cash Flows - Off-grid PV Mini Grid 60
Figure 30: Project Cash Flows - Off-grid PV Mini Grid 60
Figure 31: Specific Yield Sensitivity - Off-grid PV Mini Grid 61
Figure 32: System Price Sensitivity - Off-grid PV Mini Grid 61
Figure 33: Electricity Price Escalation Sensitivity - Off-grid PV Mini Grid 62
Figure 34: Interest Rate Sensitivity - Off-grid PV Mini Grid 62
Figure 35: Electricity Generation Costs in Comparison 63
Figure 36: World Annual Solar PV Market Scenarios 2017 - 2021 64
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List of Tables
Table 1: Targets for Grid Connected RE 16
Table 2: Electricity Generation Profile 18
Table 3: Comparison of Electricity Demand Projections (MW) 20
Table 4: Electrification Rates in Nigeria and Sub-Saharan Africa 24
Table 5: Distribution of Household with Access to Electricity by Type of Electricity
Supply in %, 2016 24
Table 6: Wholesale Contract Prices for Different Power Generation Sources 26
Table 7: Solar Power Purchase Agreements signed in 2016 33
Table 8: Loan Conditions 36
Table 9: Advantages and Challenges, Loans 37
Table 10: Leasing Financing Scheme 37
Table 11: Advantages and Challenges, Leasing 38
Table 12: Free Trade Zones in Nigeria 43
Table 13: Embedded Generation - Licensing Definitions 49
7
List of Acronyms
Acronym Definition
AA All-Action Agenda
AC Alternating Current
BP British Petroleum
BSW Bundesverband Solarwirtschaft (German Solar Industry Association)
CAC Corporate Affairs Commission
CAPDAN Computer and Allied Products Dealers Association of Nigeria
CAPEX Capital Expenditures
CBN Central Bank of Nigeria
CET Common External Tariff
CFTZ Calabar Free Trade Zone
CREN Council for Renewable Energy Nigeria
DC Direct Current
DisCo Electricity Distribution Company
ECN Electricity Commission of Nigeria
ECOWAS Economic Community of West Africa
EFCC Economic and Financial Crimes Commission
EIA Environmental Impact Assessment
EIRR Economic Internal Rate of Return
EMSL Electricity Management Services Limited
EPC Engineering, Procurement and Construction
EPIC Electrical Power Implementation Committee
EPSR(A) Electric Power Sector Reform Act
EPZ Export Processing Zone Authority
ESI Electricity Supply Industry
ESIA Environmental and Social Impact Assessment
ESMAP Energy Sector Management Assistance Program
EU European Union
FCT Federal Capital Territory
FGN Federal Government of Nigeria
FiT Feed-in Tariff
FKZ Förderkennzeichen (project funding reference number)
FMENV Federal Ministry of Environment
FMPWH Federal Ministry of Power, Works and Housing
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Acronym Definition
FTZ Free Trade Zone
FZ Free Zone
GDP Gross Domestic Product
GIZ Gesellschaft für Internationale Zusammenarbeit
GRML General Reuse Markup Language
GW Giga Watt
HV High Voltage
ICPC Independent Corrupt Practices Commission
ICT Information and Communication Technology
IEA International Energy Agency
IEDN Independent Electricity Distribution Networks
IFC International Finance Corporation
IMF International Monetary Fund
IRR Internal Rate of Return
kV Kilo volt
LCOE Levelized Costs of Electricity
MFN Most Favoured Nation
MSME Micro, Small and Medium Enterprises
MW Mega Watt
MYTO Multi-Year Tariff Order
NAHCO Nigeria Aviation Handing Company
NAPSAS National Power Sector Apprenticeship Scheme
NAPTIN National Power Training Institute of Nigeria
NBET Nigerian Bulk Electricity Trading
NBS Nigeria Bureau of Statistics
NCS Nigeria Customs Service
NDPHC Niger Delta Power Holding Company
NEEAP National Energy Efficiency Action Plans
NEMSA Nigerian Electricity Management Services Agency
NEP National Energy Policy
NEPA National Electric Power Authority
NEPP National Electric Power Policy
NEPZA Nigerian Export Processing Zone Authority
NERC Nigerian Electricity Regulatory Commission
NESI Nigeria Electricity Supply Industry
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Acronym Definition
NESP Nigerian Energy Support Programme
NGN Nigerian Naira
NGSDP National Graduate Skill Development Programme
NIPC Nigerian Investment Promotion Commission
NIPP National Independent Power Program
NIRP Nigeria Industrial Revolution Plan
NOI Country Specific Polling Services in the West Africa
NREAP National Renewable Energy Action Plans
NREDA National Renewable Energy Development Agency
NREEEP National Renewable Energy and Energy Efficiency Policy
OEM Original Equipment Manufacturer
OPEX Operational Expenditure
PEBEC Presidential Enabling Business Environment Council
PHCN Power Holding Company of Nigeria
PPA Power Purchase Agreement
PPP Private Power Project
PSI Pioneer Status Incentive
PTFP Presidential Task Force on Power
PV Photovoltaics
PVPS Photovoltaic Power Systems Program
RE Renewable Energy
REA Rural Electrification Agency
REAP Renewable Electricity Action Programme
REF Rural Electrification Fund
REMP Renewable Energy Master Plan
REPG Renewable Electricity Policy Guidelines
RESP Rural Electrification Strategy and Plan
RETF Rural Electrification Trust Funds
ROI Return on Investment
SHS Smart Home Systems
SO National Electric System Operator abbreviated as System Operation
TCN Transmission company of Nigeria
TEM Transitional Electricity Market
UAE United Arab Emirate
UN United Nation
10
Acronym Definition
UNDESA UN Department for Economic and Social Affair
UNDP United Nations Development Programme
USA United States of America
USD United States Dollar
VAT Value Added Tax
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0. Executive Summary
Nigeria’s current electrification rate is only 59% and energy demand is expected to grow
steadily due to a fast-growing population and economy. Approximately 80% of Nigerians use
alternative sources of electricity supply, particularly diesel generators, which have an
installed capacity of 8–14 GW.
Looking at the market segments it should be noted that residential usage accounts for almost
58% of overall electricity consumption, while the industrial sector only accounts for 17%. The
relatively low industrial energy consumption is an indicator of the ongoing energy crisis in
Nigeria and its consequences. To ensure further economic development and to adopt a
growing population into a strong labour force, Nigeria needs a strong industrial sector, which
in turn needs a reliable and stable supply of electricity, which has not been provided to the
extent necessary in the past. Renewable energies, in particular solar PV, can substantially
contribute to the improvement of energy supply in Nigeria – and this is being recognized by
policymakers. The National Renewable Energy Action Plans (NREAP) of Nigeria supports
the adopting of 30,000 MW in installed capacity, with a share of at least 30% in renewable
energies. The targets for the installed capacity of solar PV are 2,000 MW by 2020 and 5,000
MW by 2030.
The question now is: how to best realize these capacities and which obstacles need to be
removed to appreciate Nigeria’s undisputedly huge solar-PV potential? Solar-PV has
succumbed to a bad image based on the poor quality of the systems, due to unprofessional
installations. A number of initiatives and a few Nigerian solar pioneers however, are working
hard to resolve this image. Another more palpable, and probably the most relevant practical
constraint for the growth of solar-PV today, is the lack of financing. Due to the low capital
resources and purchasing power of large parts of the population, high inflation rates and the
lack of experience with solar-PV, banks are less willing to provide loans for solar projects,
and if they do, they do so at rates that make solar-PV plants unprofitable.
Therefore, it is important to define business models that can work. Standardising business
models is always a challenge, and this may be more so the case in Nigeria, where creativity
is paramount in developing models that create win-win situations for all parties involved in
realizing a solar-PV project. This ENABLING PV report presents different business models
that each give direction as to how PV can be exploited in different segments and installation
sizes.
In this study the German Solar Association (BSW-Solar) in cooperation with the GOPA-
International Energy Consultants GmbH (GOPA Intec), the Delegation of German Industry
and Commerce in Nigeria (AHK Nigeria), and eclareon GmbH analyse and describe the
process of investment and project development of PV power plants in Nigeria. This includes
the description of the legal and administrative framework and of import, trade and investment
conditions, as well as the presentation of selected business cases.
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1. Status of the Nigerian Power Sector
When 76 million Nigerians are living without electricity something needs to change: this
statement is a call to action for a change in the way Nigeria generates its power. Of the
overall population of Nigeria, only 59% [1] have access to electricity supply. More than 80%
of the high operating costs (over NGN 8bn / USD 53m), goes into staff salaries, pensions
and welfare contributions. The national electricity grid is characterized by high energy losses
(technical and non-technical) and by inadequate expertise to manage the distribution and
transmission network. Moreover, the transmission and distribution network has only grown at
a rate of about 16% yearly showing its inherent disability to handle the necessary power park
capacity. Taking these numbers and facts into consideration, it becomes clear that the power
sector needs to be strengthened and that renewable energy sources, in particular solar
energy, can be an important contributor to this.
Power Market Policy 1.1
The Nigerian power sector cannot be wholly analysed without considering the market policy,
strategy and development plans. It must be noted that some of these policies and measures
are fully implemented while others are awaiting the final approval and implementation by
Nigerian authorities.
General Power Market Policy 1.1.1
The Nigerian power market has been governed by a series of regulations that have
undergone transformations in the last decades. Thus, the state-owned utility Power Holding
Company of Nigeria (PHCN), known as National Electric Power Authority (NEPA) before the
unbundling of the sector, was divided into six (6) Generation Companies of Nigeria
(GenCos), eleven (11) Distribution Companies (DisCos) and the Transmission Company of
Nigeria (TCN). This unbundling was done by the federal government, following the energy
crisis of 2001, through the formulation of the Electric Power Sector Reform Act (ESPRA)
(2005) that provided the legal basis for this process.
In the hope of addressing the poor electricity service in Nigeria, which is plagued by constant
power outages, a new investor-friendly environment with a strong central regulatory
framework was created.
The objective was to transform the Nigerian power sector into a private-sector driven
market (“The Reform Objective”) by introducing transparent and responsible management,
limiting political and governmental interference in utility management, and encouraging
private investment in power generation (privatization of PHCN and Niger Delta Power
Holding Company (NDPHC)) assets. The reform process intends to support and improve
service maintenance and delivery to the Nigerian energy consumers (“The Service Delivery
Objective”). [1]
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National Electric Power Policy (NEPP), 2001
This policy statement was the initial step towards the reformation of the electricity
sector. It is the result of the consultations of the Electrical Power Implementation Committee
(EPIC), the central body tasked to elaborate, coordinate and monitor all activities relating to
the reform, restructuring and privatization of the power sector [3]. It defines the principal
phases for achieving the reform goal of a reliable system, which are:
The privatization of the vertically-integrated parastatal company NEPA and the introduction of Independent Power Projects (IPPs) as well as of private emergency power producers.
Focus on increasing the competition between market participants, reduction of subsidies (i.e. payment of full fuel prices) and sale of excess power to DisCos. [2]
National Energy Policy (NEP), 2003
The (NEP) 2003 was the first overall framework to help further develop the energy sector
and guarantee that its contribution to Nigeria’s economy improves. The broad framework
covers the development, exploitation and supply of all energy resources and how they are
utilized by various other sectors as well as the environment, energy efficiency and energy
financing. It also entails plans regarding energy policy implementation [4].
Renewable energy: The NEP 2003 remarks that the efficient conversion of energy
resources is vital to a growing development in the region.
Energy efficiency and conservation: The NEP 2003 acknowledges that the energy
utilization in Nigeria is by no means efficient. To promote this the NEP promoted the efficient
extraction of energy resources, however no specific targets were set, making the objective
vague and toothless.
Rural electrification: The NEP 2003 recommended off-grid and stand-alone systems to
increase the electricity supply to remote regions of Nigeria. [2]
Electric Power Sector Reform Act (EPSRA), 2005
The Nigerian power sector was liberalized as a consequence of EPSRA in 2005 [5].
This in itself was a consequence of the NEPP which was adopted in 2001 providing a new
legal and regulatory framework for the sector.
The act mandates that the Nigerian Electricity Regulatory Commission (NERC) ensure that all electricity generated is efficiently sourced and delivered to the consumers using
the grid. NERC, being the Nigerian power sector’s principal regulator, is responsible for
setting cost-reflective tariffs, issuing licenses, and determining operating codes and
standards.
Recommendations in EPSRA include: the creation of the Rural Electrification Agency (REA)
and proposals regarding the expansion of the main grid, the development of isolated and
mini-grid systems and renewable energy power generation be prepared for the President of
Nigeria. The act also mandated that the REA prepare a strategic plan regarding the
expansion of access to electricity using renewable energy. [2]
Renewable Electricity Policy Guidelines (REPG), 2006
The Renewable Electricity Policy Guidelines issued by the Federal Ministry of Power and Steel made it a condition that the federal government expand the share of renewable
14
electricity to at least 5% of total national electricity generation and a minimum of 5 TWh
of electric power production by 2017 [5].
The document examined the electricity sector and analysed the progress of renewable
energies under previous energy policies, thereby evaluating the effectiveness of existing and
preceding policies and their targets. The document also set the following policy objectives to
promote the use of renewable energies in the power sector:
1. Expansion of the market for renewable electricity to at least five percent of total
electricity generating capacity and a minimum of 5 TWh of electric power production;
2. Establishment of stable and long-term favourable pricing mechanisms and ensuring
unhindered access to the grid with guaranteed purchase and transmission of all
electricity produced by renewable electricity producers and obliging the grid operators
to upgrade the system accordingly;
3. Construction of independent renewable electricity systems in areas not covered by the
electricity grid;
4. Development of innovative, cost-effective and practical measures to accelerate access
to electricity services in rural areas through renewable energy sources;
5. Setting up of a Renewable Electricity Trust Fund to be governed by the Rural
Electrification Fund;
6. Creation of a multi-stakeholder partnership for the delivery of renewable electricity to
meet national development goals;
7. Broadening international cooperation in expanding the role of renewable electricity for
meeting national development goals and contributing to global efforts in addressing
climate change.
The REPG facilitated that the Rural Electrification Trust Funds (RETF) be set up to promote,
support and provide renewable electricity through private and public-sector participation. [2]
Renewable Electricity Action Programme (REAP), 2006
The REAP set out a roadmap for implementing the Renewable Electricity Policy Guidelines.
The focus was to promote the use of all forms of renewable energy sources in electricity
generation by highlighting the disparities between policy guidelines and the realities of
implementation. The REAP highlighted the great potential that renewable energies have and
the newest technologies that are making them even more attractive. The REAP also laid out
the strategies developed to achieve the targets set for each form of renewable technology.
[6]
National Renewable Energy and Energy Efficiency Policy (NREEEP), 2015
The NREEEP outlined the policies and measures to be implemented to promote renewable
energy and energy efficiency in Nigeria [7]. NREEEP sought to bring policymakers’ attention
to the great economic, political and social potential of renewable energy. It recommended
that strategies be developed to harness the great potential of renewable energies and to
propel the ongoing changes in Nigeria’s power sector even further. It is an umbrella that
streamlined the other aforementioned policies and strategies into one document.
The policies laid out in the NREEEP led to development of the National Renewable Energy
Action Plan [8] which put in writing how the objectives are to be achieved step-by-step. The
NREEEP’s overall objective is the optimal utilization of the nation’s energy resources for a
more sustainable development. [2]
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Strategy and Plans 1.1.2
Roadmap for Power Sector Reform, 2010/2013 – Plans
In December 2012, the Presidential Task Force on Power (PTFP) presented its Roadmap for
Power Sector Reform [9], an updated edition of the Roadmap for Power Sector Reform 2010
[10]. The new roadmap reviewed and calibrated plans and strategies for Nigeria’s power
sector to produce clean and efficient electricity at competitive rates. [2]
Renewable Energy Master Plan (REMP), 2005/2012
The Renewable Energy Master Plan (REMP), drafted by the Energy Commission of Nigeria
and the United Nations Development Programme (UNDP) in 2005 and updated in 2012,
highlights Nigeria’s vision for a sustainable future and how renewable energies can help enable faster progress on this front [10]. The REMP recommended integrating renewable
energies into buildings, electricity grids and “other distribution systems” [9].
While promoting the increased use of renewable energy the REMP also set the following targets to increase electrification rates in Nigeria: from 42% in 2005 to 60% in 2015 and
75% by 2025.
The plan includes issues that are common to all sub-sector programmes:
The legal, regulatory and institutional framework,
Incentives (financial and fiscal, e.g. tax exemptions),
Capacity building (human and infrastructural),
Inter-agency/governmental collaboration,
Research and development,
Monitoring and evaluation,
Renewable energy portfolios and feed-in-tariffs. [2]
Draft Rural Electrification Strategy and Implementation Plan (RESIP), 2016
In Nigeria plans for rural electrification are coordinated at the federal level, whereas the
implementation of these plans is carried out by the states. RESIP is a document that tells
states and local government that: “The primary objective of the Nigerian Rural Electrification
Policy and by extension this Rural Electrification Strategy and Implementation Plan is to
expand access to electricity as rapidly as possible in a cost-effective manner. This implies full use of both grid and off-grid approaches, with subsidies being primarily focused on
expanding access rather than consumption.” It seeks to do so by “promoting a full
menu of rural electrification options, grid, off-grid (mini-grid and stand-alone)”
systems. [11]
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National Renewable Energy Action Plans (NREAP) (2015-2030)
In July 2016, the Federal Government of Nigeria, supported by the European Union (EU) and
the German Government, adopted the following four documents [12]:
the National Energy Efficiency Action Plans (NEEAP),
the National Renewable Energy Action Plans (NREAP),
the Sustainable Energy for All-Action Agenda (SE4ALL-AA), and
the Nigerian Power Sector Investment, Opportunities and Guidelines.
The NREAP supports an electricity vision of attaining 30,000 MW of power (on/off-grid) by
the year 2030 with at least 30% RE in the electricity mix. Three development phases are
intended: attaining a stable, then sustainable and finally uninterrupted power supply in
Nigeria.
The NREAP provides useful information on the renewable energy potential and market in
Nigeria, the relevant policies and barriers to overcome, and is a useful tool for the
development, implementation and promotion of renewable energy measures. The 30% goals
were supposed to be supported by installation of grid connected solar PV plants. The targets
for installed capacity from solar PV are 2,000 MW by 2020 and 5,000 MW by 2030.
A good portion of the electricity vision can be achieved by means of renewable energy as
shown in Table 1.
Table 1: Targets for Grid Connected RE
Installed Capacity 2010 2020 2030
RE installed capacity [MW]
(including large and medium scale hydro)
916 5,325 13,800
RE share of the total installed capacity [%]
(including medium and large hydro)
21 52 43
Total RE generation [GWh]
(including medium and large hydro)
4,749 20,031 49,766
RE share in the electricity mix [%]
(including medium and large hydro)
17 38 29
Source: National Renewable Energy Action Plans (2015–2030) [13]
Electricity Generation 1.2
Status of Generation Capacities 1.2.1
The Nigerian electrical power system has four basic power generation options:
1. Transmission based on-grid generation
2. Embedded generation
3. Off-grid generation and
4. Captive generation.
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While licenses are needed to operate options 1, 2 and 3, captive generation only requires a
permit from NERC. [14]
The existing regulations only apply to electricity generation exceeding 1 MW of
installed capacity. Captive generation implies that electricity generated is consumed by the
generator itself, as is the case in households or companies that run their own diesel generators. Captive generation is off-grid, meaning that it is not connected to the national or
a distribution grid.
Power generation with off-grid generation licenses require external off-takers. These are
traditionally households in remote villages, public facilities (for example schools or health
stations) and/or businesses
Power generated from embedded generation is distributed using an external distribution
company. Embedded generators are therefore usually connected to the distribution grid.
On-grid generation licenses are necessary for all power plants which distribute their power
on the national transmission grid. [2]
Figure 1 shows all large, on grid power generation sites in Nigeria, including those owned by
NIPP, Federal Government of Nigeria (FGN) and privatized plants. The figure also shows
embedded power generation sites. These power generation plants are mainly depending on
fossil fuel, which is well available in the southern parts of Nigeria. The northern parts of
Nigeria do not have large power generation facilities. Those parts of Nigeria are supplied with
electricity by means of high-voltage transmission lines.
Figure 1: Power Generation Sites in Nigeria
Source: Detail Solicitors; 2015 [15]
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On-grid power Generation 1.2.2
Table 2 shows how electricity was generated in Nigeria from 2007 to 2014. As stated by
NERC, the licenses for on-grid power plants amounted to 19,407 MW in 2014, while off-grid
licences cover a production capacity of only 305 MW and embedded generation capacity
covers 49 MW. At this point it should be noted that electrical power from captive power
generation is much higher than that provided by power plants with off-grid licenses and
embedded generators. [2]
Table 2: Electricity Generation Profile
Year
Ave. Gen.
availability
(MW)
Maximum
peak
generation
(MW)
Maximum
daily
energy
generated
(MWh)
Total energy
generated
(MWh)
Total energy
sent out
(MWh)
Per
Capita
Energy
Supply
(kWh)
2007 3,781.3 3,599.6 77,322.3 22,519,330.5 21,546,192.2 155.3
2008 3,917.8 3,595.9 86,564.9 18,058,894.9 17,545,382.5 120.4
2009 4,401.8 3,710.0 82,652.3 18,904,588.9 18,342,034.7 122.0
2010 4,030.5 4,333.0 85,457.5 24,556,331.5 23,939,898.9 153.5
2011 4,435.8 4,089.3 90,315.3 27,521,772.5 26,766,992.0 165.8
2012 5,251.6 4,517.6 97,781.0 29,240,239.2 28,699,300.8 176.4
2013 5,150.6 4,458.2 98,619.0 29,537,539.4 28,837,199.8 181.4
2014 6,158.4 4,395.2 98,893.8 29,697,360.1 29,013,501.0 167.6
Source: NERC Archive [16]
Figure 2 illustrates how the licenses for grid-connected generation capacity (options 1 and 2)
are combined. Dark blue represents ‘available capacity’ and light blue ‘non-operational
installed capacity’. 13,308 MW installed capacity is attributable to the main power plant fleet,
the remainder (~31% of licensed capacity) has not yet been built or is under development.
Within the existing power plant fleet, NIPP thermal power plants (~40%) and former PHCN
thermal power plants (~34%) are contributing the most to the installed capacity. According to
NERC statistics, 80% of actual generation capacity in 2015 came from gas-based power
plants, while the remaining energy came from hydro power plants. A detailed overview of the
existing power plant fleet in Nigeria is as shown in figure 2 above.
The Presidential Task Force on Power regularly publishes the estimated peak demand and
peak generation, whereby the former was with 12,800 MW regularly close to four times the
latter. The only way the shortfall can be made up is by relying on off grid electricity
generation. [2]
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Figure 2: Break-Down of On-Grid Licensed Power Generation in Nigeria, 2012
Source: GOPA International Energy Consultants GmbH; 2015 [2](dark blue = available capacity, light
blue = non-operational installed capacity)
Off-Grid Power Generation 1.2.3
As already mentioned in the previous chapter, off-grid licenses cover a production capacity of
only 305 MW, while licensed embedded generation capacity only represents 49 MW.
Most private investors invest in captive generation to guarantee sustainable and stable power supply for manufacturing facilities. The figures listed above do not account for the
generation capacities of privately-owned diesel or gas generators.
According to a 2013 survey, approx. 80% of Nigerians use alternative sources of energy to
get a steady supply of electricity. Of these alternative energy sources generators are used by
a much higher margin than solar PV systems. Estimates suggest that decentralized diesel
generators generate between 8 and 14 GW of total capacity currently installed in Nigeria.
About 86% of companies in Nigeria own or share a generator and about 48% of their total
electricity demand is covered by these captive power generators. With several million
privately operated diesel generators, Nigeria is Africa’s leading importer of generators and
one of the leading worldwide importers. Total annual imports amount to NGN 17.9 billion
(USD 112 million).
Captive generation offers some distinct advantages for the Nigerian power system. These
advantages include: industrial consumers being able to generate the power needed for their
operations, getting permits for captive generation is less risky financially and captive
generation permits the effective use of electric power because no technical transmission or
commercial losses occur. [2]
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Electricity Consumption and Demand 1.3
Electricity Demand 1.3.1
Households account for almost 58% of electricity consumption in Nigeria and it is the
residential sector that will account for the highest increase of energy consumption in the next
twenty-year period.
Energy consumption is expected to increase quite dramatically in the next years
because of a growing population and strong economic growth. Demand for on-grid
electricity is expected to increase more than demand for off-grid electricity. The World Bank
projected that total electricity demand will grow by a factor of 5 by 2035 to almost
530 TWh. Generators with a capacity of 65 GW could satisfy this demand if they run
throughout the year at their maximum output level. [2]
Table 3: Comparison of Electricity Demand Projections (MW)
2014 2015 2020 2025 2030 2035 2040
Agusto & Co. 12,800 41,133 88,282 – – – –
Renewable
Energy Master
Plan (reference
growth 7%)
– 24,380 45,490 79,798 115,674 161,651 213,122
Presidential Task
Force on Power
(PTFP)
– 12,800* – – – – –
PTFP, distribution
capacity
10,648 – 32,774 – – – –
Tractebel
Engineering
– – 11,433 – 24,208 – –
NREEEP 2,483 8,188 23,134
Source: Nigeria Power Reform; 2015 [17]
Electricity Consumption 1.3.2
Figure 3 compares the total electricity consumption by economic sector in Nigeria to selected
emerging economies based on the most recent data from 2015.
21
Figure 3: Total Electricity Consumption by Economic Sectors and Consumption Per Capita for
Nigeria and Peer Countries (2015)
Source: IEA; 2015 [18]
The Nigerian industry has a relatively low energy consumption of 16.6% when compared to
other emerging countries. There are several reasons for this: (1.) the Nigerian industry is
quite small due to an over-dependence on oil exports, which leads to a high import-
dependent economy. This makes it cheaper to import goods rather than producing them
locally because the cost for machinery and spare parts is high. (2.) It is difficult to gather
reliable statistics because many industrial companies operate off-grid due to an unreliable or
complete lack of a grid connection. This makes it difficult to calculate the energy
consumption of companies that run their production using energy produced by diesel
generators.
Power Outage Statistics 1.3.3
The failures of the power sector have resulted in a situation that has been hampering, if not
damaging the economy and infrastructural development in Nigeria for decades. Among these
challenges a few are: unconducive environments for investors, the general underfunding of
the power sector and a lack of good regulations. The funding issue resulted in a face-off
between the National Assembly and the Minister of Power, Works and Housing according to
Mr. Babatunde Fashola. However, the non-compliance of electricity consumers to pay for
power consumed, coupled with the inability of the DisCos to pay for the power delivered to
the customers, have also affected the sector, especially since the generation and distribution
components are being handled by private investors. The National Electric System Operator
or System Operator (SO), an arm of the TCN, put the general national peak demand forecast
at about 19,100 MW, while recent peak power levels generated hover between just 4,000
MW and 5,000 MW [19] . This translates into unavailable or unstable power supply in
response to the effective demand.
22
With the aim of monitoring the progress made so far since the power sector reforms in
Nigeria, NOI Polls introduced the Power Polls in 2013 to explore the perception of Nigerians
towards the power sector reforms [20]. The polls were conducted on a monthly basis in order
to analyse the daily amount of power supply delivered and the general state of power supply
to households.
Erratic Power Supply
New aggregated power poll results released by NOI Polls for the first half of 2017 (January to June 2017) display an average coverage of 30.5%, revealing a decline in power supply to
Nigerian households when compared to the second half of 2016 (July to December 2016)
where the coverage was at an average of 41.5% [21]. This significant drop can be attributed
to the reported shortage of gas supply experienced by the sector and grid instabilities caused
by weak transmission infrastructures.
Quarterly Trend on Power Supply
The analysis of the poll series results revealed that only about 3 in 10 Nigerians nationwide
experienced an improvement in power supply in the first semester 2017. The more detailed
quarterly evaluation revealed that only 31% of adult Nigerians reported a minimal increase in
power supply to their households in quarter two (Q2), 2017. This merely represents a 1%
increase in absolute numbers when compared to Q1, 2017. [22]
Quarterly Average Daily Cumulative Power Supply to Nigerian Households
The analysis of survey findings also revealed that the average cumulative power supply to
nationwide Nigerian households for Q1 2017 was 8.9 hours compared to 9.3 hours in Q2
2017, reflecting at best a fractional improvement.
Average Monthly Improvement in Power Supply
Monthly analysis has further shown that the highest improvement in nationwide power supply
was in the month of March 2017 with 35% while the month of January displayed a negative
development with only 21%. January’s minimum is likely connected to the decline in power
generation during quarter four (Q4) of 2016 since Nigeria’s generation statistics show that a
total average of just 2,159 MW of power was generated by power stations during the fourth
quarter of 2016. Despite a 14%-point surge from 21% in January to 35% in March, the power
supply fluctuates tremendously throughout the year. [23]
Average Monthly Daily Cumulative Power Supply to Nigerian Households
The analysis of survey results also revealed that the month of February recorded the highest
average daily cumulative power supply to Nigerian households with 9.8 hours while January
displayed the lowest supply with 7.5 hours.
23
Transmission and Distribution Grid 1.4
Transmission Grid 1.4.1
Nigeria’s national grid operates at 330 kV and 132 kV high voltage level (HV) [24]. Nigeria’s
transmission network consists of 159 high voltage substations with a total (theoretical)
transformation capacity of 19,000 MW and over 15,022 km of transmission lines. Nigeria’s
transmission wheeling capacity of 5,338 MW is higher than average operational generation
capacity of 3,879 MW but it is far below the total installed generation capacity of 12,522 MW
[25]. The national grid configuration has an installed capacity of 6,500 MW but can handle a
wheeling capacity of maximum 4,500 MW [26]. The long-term planning of TCN is to further
improve the grid capacity - thereby topping the installed generation capacity to 20 GW by
2020. Already approved TCN and NIPP transmission projects could increase transmission
lines to a total length of 21,035 km and the grid wheeling capacity to 7,230 MW. [27]
Distribution Grid 1.4.2
In the process of the privatisation programme, the PHCN distribution network was broken up
into 11 regional distribution grids. Those distribution grids were sold to foreign investors with
a minority stake held by the FGN. The distribution grids vary in geographic area, capacity
and served customers. The Nigerian DisCos are: Abuja, Benin, Eko, Enugu, Ibadan, Ikeja,
Jos, Kaduna, Kano, Port Harcourt and Yola.
The distribution grid operates mainly on 33 kV and 11 kV voltage. A major problem of the
distribution companies are 46% losses of energy due to technical, commercial and collection
losses. This affects the companies’ financial stability as the revenue is insufficient to cover
the full market costs. [27]
Electrification 1.5
Electrification Rate 1.5.1
Nigerian generation facilities are heavily concentrated in Southern Nigeria, resulting in high
losses and load shedding within the transmission system when electricity is transported
north. Nigeria’s geography makes delivering energy to smaller towns difficult without the
appropriate infrastructure. Theft from illegal connections to the grid is another challenge that
needs to be addressed. The reasons for the relatively low levels of electricity access and
frequent blackouts in Nigeria are reported in the General Household Survey conducted between 2015–2016 [28]. Over 60% of surveyed rural households attributed the reason
for lack of electricity access to frequent grid failures and high connection costs. The
unreliability of services was also reported as one of the reasons for low electrification rates in
Nigeria. [29] [2]
In 2016, the overall electrification rate in Nigeria was 59%, but still higher than the 43%
average electrification rate in Sub-Saharan Africa. As further detailed in Table 4, there is a sharp discrepancy between cities and rural areas, as the rate of urban electrification in
Nigeria is 86% compared to a rural electrification rate of just 41%. According to
government plans, an overall electrification rate of 75% shall be achieved by 2025, as
emphasized in the Nigeria Vision 20:2000 and in the Draft Rural Electrification Strategy and
Plan [30].
24
Table 4: Electrification Rates in Nigeria and Sub-Saharan Africa
Region Sub-Saharan Africa Nigeria
Population without electricity 591 million 76 million
Overall Electrification rate (%) 42 59
Urban Electrification rate (%) 76 86
Rural Electrification rate (%) 25 41
Source: World Bank; 2016 [31]
Table 5 shows the distribution of households with access to electricity in Nigeria. The table
distinguishes electricity supply from PHCN, private generators and solar panels and
electricity supply from rural electrification (i.e. mini-grids). As shown in the table, the type of
electricity supply varies significantly by state. There is a clear North/South divide, that can be
attributed to the location of the thermal power stations in the South and the distance involved
when wheeling out the power to the North. Figures for the states that have made the most
progress in rural electrification are marked yellow, while green highlights states where the
reliance on diesel generation was considered exceptionally high. It should be remarked that minus a few states little progress has been made in rural electrification in the time
period considered.
The varying electrification rates in the states can also be regarded as indications of
market opportunities, because the states with the lowest grid-electrification, are the states
where there is the greatest need and therefore the greatest potential for investments in rural
electrification. Rural areas that did not have any connection to the grid until 2010 were left to use their own generators. In other words, rural electrification is neither regulated nor
structured in a planned manner. [2]
Table 5: Distribution of Household with Access to Electricity by Type of Electricity Supply in %, 2016
State
PHCN
(NEPA)
only
Rural
Electrification*
Private
Generator
PHCN/
Generator
Rural
Electricity/
Generator
Solar
Panel
Abia 89.6 0.9 0.5 5.0 4.1 0.0
Adamawa 89.5 2.9 1.9 4.8 1.0 0.0
Akwa Ibom 82.8 0.4 2.9 13.1 0.8 0.0
Anambra 81.0 1.7 1.0 15.6 0.7 0.0
Bauchi 77.5 8.0 1.4 9.4 3.6 0.0
Bayelsa 33.1 36.1 2.3 2.3 26.3 0.0
Benue 68.5 14.4 2.7 10.8 3.6 0.0
Borno 87.9 6.1 0.0 6.1 0.0 0.0
Cross River 91.7 6.2 0.5 1.6 0.0 0.0
Delta 93.6 2.7 1.5 1.5 0.8 0.0
25
State
PHCN
(NEPA)
only
Rural
Electrification*
Private
Generator
PHCN/
Generator
Rural
Electricity/
Generator
Solar
Panel
Ebonyi 78.9 12.7 0.0 1.4 7.0 0.0
Edo 93.1 2.1 1.2 2.7 0.9 0.0
Ekiti 91.1 1.0 0.8 6.9 0.3 0.0
Enugu 75.0 16.9 1.3 5.9 0.8 0.0
Gombe 94.7 3.2 0.0 2.1 0.0 0.0
Imo 85.4 5.0 2.1 7.5 0.0 0.0
Jigawa 93.2 0.9 0.0 4.3 0.9 0.9
Kaduna 84.8 5.1 2.0 7.6 0.5 0.0
Kano 87.0 6.0 0.0 4.0 3.0 0.0
Katsina 80.4 14.7 0.0 4.3 0.0 0.6
Kebbi 86.4 1.6 3.8 7.1 1.1 0.0
Kogi 79.2 3.3 0.4 15.8 1.3 0.0
Kwara 92.8 1.8 0.3 2.4 2.7 0.0
Lagos 67.9 1.2 1.2 25.9 3.5 0.2
Nasarawa 76.0 0.6 7.2 13.2 3.0 0.0
Niger 75.2 1.8 0.9 21.7 0.0 0.4
Ogun 94.5 0.3 0.0 5.2 0.0 0.0
Ondo 87.5 0.8 2.9 2.9 5.8 0.0
Osun 90.5 0.0 0.4 7.1 2.0 0.0
Oyo 97.7 0.9 0.5 0.9 0.0 0.0
Plateau 92.5 1.3 1.3 3.8 1.3 0.0
Rivers 66.0 26.3 6.7 1.0 0.0 0.0
Sokoto 90.4 6.6 0.6 1.8 0.6 0.0
Taraba 85.7 0.0 0.0 14.3 0.0 0.0
Yobe 77.0 6.9 1.1 11.5 3.4 0.0
Zamfara 87.0 6.9 0.0 3.8 1.5 0.8
FCT Abuja 67.4 0.9 1.9 27.6 2.2 0.0
Sector
Urban 83.2 2.7 0.8 11.3 2.1 0.0
Rural 81.5 7.5 2.0 6.2 2.6 0.1
National 82.2 5.5 1.5 8.4 2.4 0.1
Source: NBS; 2014 [32]
26
Grid Development Plans 1.5.2
The Transmission Company of Nigeria developed a 5-year transmission system expansion
plan that covers the period of 2016-2022. This plan is meant to bring the wheeling capacity
from 5,300 MW to 20,000 MW by 2022 as part of short term measures and to urgently
address the shortfall in the transmission sub-sector of the electricity supply industry (ESI).
Electricity Tariffs and Costs 1.6
Electricity Tariffs On-grid 1.6.1
The electricity prices are set centrally by the Nigerian Electricity Regulatory Commission in
line with its MYTO. Within the electricity system, DisCos pay the Nigerian Bulk Electricity
Trading (NBET) company, the central market intermediary between GenCos, DisCos and the
TCN, for the electricity they receive from the GenCos. NBET then refunds GenCos for the
bulk power sent to the grid. The respective prices are fixed per fuel source. The wholesale
contract price for different power generation sources is provided in Table 6. [2]
Table 6: Wholesale Contract Prices for Different Power Generation Sources
Power generation sources
NBET Contract price USD/MWh (2013)
NBET Contract price NGN/MWh (2013)
Gas Power Plant
64.10 10,257
Hydro Power Plant
158.75 25,400
Solar PV Plant 458.13 73,300
Source: NBET; 2013 [37]
On the other hand, consumers pay DisCos for the electricity they consume. Here, prices are
fixed per region and consumer category. The price to be paid by the end consumer for
electricity in Nigeria is not to be confused with the price paid to GenCos.
The MYTO methodology combines the regulation of rates of return and price caps, which
change by region and type of electricity customer. The regulators factor three modules into
their calculations: the allowed return on investment (ROI), the allowed return of capital, as
well as efficient operating costs and overheads. Hence, the costs factored into the prices
were assessed individually for power generation, transmission, distribution and retail rates
differ.
In order to attract investment in the sector, MYTO emphasizes cost recovery and financial
viability, whereby the intention is to encourage efficient investments. The multi-year structure
provides investors with a firmer basis for planning. Also, the tariffs foster an efficient use of
the network, as tariffs are structured to reflect the marginal costs that users place on the
system. It is worth mentioning that the tariff design by NERC was implemented for DisCos. It
was intended to ensure that a distinction is made between private, commercial and industrial
users with regard to electricity prices, while enabling DisCos to remain commercially viable.
Each DisCo has tariffs reflecting its uniqueness in terms of cost, location and customer
profile.
27
The Ministry of Finance has provided a maximum subsidy of NGN 50 billion (USD 312.5 million) for 2012 and 2013 and solely for residential customers. NERC retained a minimum
tariff at 4.00 NGN/kWh (0.025 USD/kWh) for all those consuming below 50 kWh/month.
Cross subsidies from large residential (category R), commercial (category C) and industrial
(category D) customers to small residential customers are inherent to the tariff design
because the Federal Government subsidy is not sufficient. [34] [2]
Electricity Tariffs Off-grid and Diesel-based 1.6.2
The following analysis was conducted as part of the Nigerian Energy Support Programme
(NESP) and published in the GIZ study The Nigerian Energy Sector. [2]
The projected prices for off-grid electricity are shown in Figure 4. In the set-up of the
Nigerian electricity market, off-grid generation based on medium-sized diesel gensets
is far more expensive for the consumer than on-grid supply of electricity. The World
Bank estimates the cost for power generation with medium-sized diesel gensets at
approx. 250 USD/MWh (corresponding to 40 NGN/kWh). This is significantly higher
than the electricity prices for residential usage and higher than electricity prices of
19.89 to 29.58 NGN/kWh (0.124 – 0.185 USD/kWh) for industrial usage, purchased from
the DisCos based on MYTO 2.1 [35]. Small scale businesses and families spend an
average of NGN 3.5 trillion (USD 21.8 billion) a year to power their generating sets with
diesel and petrol due to the unstable supply of electricity. [36]
Figure 4: Electricity Tariffs Off-grid and Diesel-based Projections
Sources: IEA; 2010 [37]
The interesting aspect in Figure 4 is the clearly projected decrease in price of electricity
generated by solar PV. The price is expected to fall to the level of small hydropower plants,
with the power generation costs of PV diesel hybrid systems falling at similar rates.
It can be noted that solar PV power is already substantially cheaper than electricity produced
using diesel generator sets. This is especially the case in areas at long distances from diesel
depots, thus mostly in northern Nigeria. This price trend is consistent with all international predictions on PV prices in relation to other means of power generation. In Nigeria, more
28
than in many other countries, fossil fuel prices are expected to rise disproportionately
due to expected subsidy cuts. Taking this into consideration, solar PV plants outperformed
diesel generator set much earlier than predicted in the Energy Sector Management
Assistance Program (ESMAP) 2007 study [38]. Solar PV diesel hybrid systems can thus be
clearly expected to take hold over time.
National Stakeholders 1.7
Federal Ministry of Power, Works and Housing (FMPWH)
In the power sector, the FMPWH is responsible to formulate and implement the policy of the
FGN with respect to the generation, distribution and transmission of the nationwide power.
FMPWH has supported pilot solar projects in Ogun and Cross River states and built a
pilot wind farm in Katsina [39]. The REA, NEMSA and NAPTIN are affiliated to the
FMPWH, whereby the ministry oversees the independent regulator, NERC. [2]
Nigerian Electricity Regulatory Commission (NERC)
The Nigerian Electricity Regulatory Commission was established as an independent
regulatory agency in 2005 under EPSRA 2005. Its mandate is to monitor and regulate the
electricity industry of Nigeria and ensure compliance with market rules and operating
guidelines.
Moreover, NERC is responsible for assessing applications for licenses to operate
independent power plants larger than 1 MW. In this process NERC supervises the
eligibility of companies that apply for licenses and negotiates power purchasing
agreements with the central off-taker in the transitional market, the NBET.
To create a positive investment climate for rural electrification projects, NERC expanded the
regulatory guidelines for mini-grids with less than 100 kW and light-handed regulation for
mini-grids between 100 kW und 1 MW. [2]
Rural Electrification Agency of Nigeria (REA)
The Rural Electrification Agency was established as part of the ESPRA in 2006. The REA’s
coordinates rural electrification activities in Nigeria and manages the Rural Electrification
Fund (REF). The agency’s main function is to expand the reach of the electric power supply
in rural areas.
The REA provides overall support and coordination of rural electrification activities to various
stakeholders such as public-private partnerships, private investors and community
owned/operated projects. REA through its offices in each of the six geopolitical zones,
conducts feasibility surveys, market surveys, and willingness to pay surveys to ensure easy
offtake. The REF Management Directorate of the REA is responsible for establishing and
administering the REF and for providing capital subsidies in a transparent competitive
process to qualified rural electrification schemes developed by public and private sector
entities. [2]
National Power Training Institute of Nigeria (NAPTIN)
The National Power Training Institute of Nigeria (NAPTIN) was established in March 2009 to
satisfy the high demand for training in the power sector. NAPTIN operates eight regional
training centres in Afam, Akangba, Ijora, Jos, Kaduna, Kainji, Kano and Oji from its
headquarters in Abuja.
29
NAPTIN’s focus is government-funded technician training courses. Flagship programmes
include the National Graduate Skill Development Programme (NGSDP) and the National
Power Sector Apprenticeship Scheme (NAPSAS) which is aiming to train 7,400 graduates in
a broad range of technical power professions. [2]
Nigerian Electricity Management Services Agency (NEMSA)
The Nigerian Electricity Management Services Agency (NEMSA) is a governmental agency
under the jurisdiction of the FMP. The agency provides support services to Nigeria’s
electricity generation, transmission and distribution sector [40]. Its purpose is to guarantee
efficient and reliable production and delivery of power and to ensure that safety standards
are maintained in the electricity sector.
NEMSA inspects, tests and certifies the Nigerian power industry’s electrical materials,
equipment, power systems and electrical installations. All installations are tested against the
technical standards and regulations that NEMSA sets. NEMSA also provides advanced
training for technicians and licenses technical personnel. [2]
Federal Ministry of Environment (FMENV)
The Federal Ministry of Environment (FMENV) was established in 1999 and is responsible
for protecting the environment against pollution and degradation and ensuring the
conservation of natural resources for a more sustainable development in Nigeria [41].
FMENV’s Department of Climate Change coordinates all matters regarding climate change
and represents the Ministry at international climate negotiations.
The Department of Climate Change’s objective is to better enable renewable energy and
energy efficiency in Nigeria. Its focus is the sustainable use of biomass for cooking purposes
and small-scale agricultural applications.
The FMENV is also the regulator for the Environmental and Social Impact Assessment
(ESIA). ESIA are mandatory for all development projects as per the Nigerian EIA Act No. 86
of 1992. [2]
Energy Commission of Nigeria (ECN)
The Energy Commission of Nigeria (ECN), established in 1988, is “charged with the
responsibility for strategic planning and co-ordination of national policies in the field of energy
in all its ramifications” (ECN Act) [42]. This includes advisory services to the government
regarding energy strategies, promoting research activities, development and training, and
liaising with other international energy organisations.
Energy research, development and training related activities are organized in the six
technical departments and the six energy research centres. Two centres, located at Nsukka
and Sokoto, are responsible for new and renewable energy research. The centre in Lagos
focuses on energy efficiency and conservation, while the centre in Benin City specialises in
energy and environment. The two centres in Ilorin and Bauchi are responsible for research in
the areas of hydropower and petroleum respectively.
The ECN was instrumental in launching the Renewable Energy Master Plan (2012). Another
of its significant contributions was the preparation of the first National Energy Policy which
was launched in 2003. This policy is currently undergoing revision. [2]
30
Nigerian Bulk Electricity Trading Plc (NBET)
The Nigerian Bulk Electricity Trading Plc (NBET) is a government owned public liability
company [43]. The Bureau of Public Enterprises and the Ministry of Finance are its two
shareholders of record with 80% and 20% stakes respectively.
NBET was established in 2010 to meet provisions of the Electric Power Sector Reform Act
(EPSRA). Its mandate is to manage the purchase and resale of electricity from independent
power producers.
NBET signs PPAs with privatised generation companies, greenfield IPPs and existing
state-owned power plants. They resell power using vesting contracts with distribution
companies and sign power sales agreements with eligible customers directly. NBET’s power
purchase agreements (PPAs) with independent power producers are backed by credit
enhancement instruments provided by the FGN. [2]
Council for Renewable Energy Nigeria (CREN)
Launched in November 2014 at Energetic Solutions, the Council for Renewable Energy
Nigeria (CREN) is a non-profit, multi-stakeholder association that promotes the appropriate
use of renewable energy technology in Nigeria and the reduction of greenhouse gases
through reduced consumption of fossil fuels [44]. CREN has a unique position in Nigeria to
effectively build partnerships and facilitate the large-scale implementation of renewable
energy. The Council for Renewable Energy Nigeria (CREN), CREN aims to bring together
the professional sector, government and civil servants, academics, associations,
industry, financial institutions and services, the non-profit sector and end-users. It acts
as a forum where all stakeholders can work together for the efficient and appropriate
implementation of renewable energies and to develop a comprehensive sustainable energy
strategy for Nigeria. CREN strives to create public awareness and foster the emerging
availability of reliable and economically viable renewable energy systems by supporting the
policy implementation and research of these new renewable energy systems. [2]
31
2. Status of the Nigerian PV Sector
The following section gives an overview of the Nigerian PV Sector including its general
acceptance, the regulatory and business framework as well as possible customer segments
for Solar PV in Nigeria.
General Perception and Acceptance of PV 2.1
The awareness and information about opportunities offered by RE and their technologies are
very low among public and private actors. This lack of information and awareness creates a
market gap that results in an unnecessary higher risk perception for potential renewable
energy projects. The general perception is that renewable energy technologies are not yet
mature technologies in Nigeria and that they are only suited for niche markets and as such
will require heavy subsidies. There is therefore, a need for dissemination of information on
renewable energy resource availability, benefits and opportunity to the public to raise public
awareness and trigger activities in this area. Such a process is paramount to building public
confidence and acceptance of renewable energy technologies.
Consequently, providing information to selected stakeholder groups such as investors, can
help mobilize financial resources needed to promote renewable energy technology projects.
The Renewable Energy Master Plan proposes the setup of a National Renewable Energy
Development Agency (NREDA) [45], which will assist in increasing public awareness and
providing information and assistance to interested stakeholders. This will be done together
with non-governmental organizations (NGOs).
With the level of awareness about the viability of RE, and in particular solar energy being
very low in the country, most of schools' curricula lack adequate information on solar and
other renewable energy sources. Mass media too has not helped in any way: hardly any
information regarding solar, wind or biomass energy technologies and utilization can be seen
in newspapers or experienced on television or radio. This lack of awareness has also led to a
perception of technical ineptitude and it severely hampers the adoption of solar PV as a
reliable source of power generation. The acceptance of solar PV gained momentum in
Nigeria following the government’s initiative to create the Council for Renewable Energy
Nigeria (CREN) in 2004. CREN is a non-profit association with the objective to promote
renewable energy technologies and to reduce greenhouse gas emissions by reducing the
consumption of fossil fuels.
Regulatory and Business Framework 2.2
There are two areas where regulating on-grid renewable energy projects are crucial. First in
the process of submitting a dossier to NERC to obtain a license for a renewable energy IPPs.
(1.) Getting a license for conventional IPPs is the same process, even though the power
purchase agreements (PPAs) are significantly different. Conventional PPAs require an
analysis of feedstock prices and yet this does not apply to most renewable energy projects.
(2.) The second area relates to grid access and requirements, more specifically the grid code
and potential entry points [46]. These are decided by NERC in consultation with the TCN.
The grid code is a regulatory document initiated by NERC which delivers revalidation of
aggregate technical, commercial and collection losses (ATC & C losses), and a minor tariff
review.
32
In terms of policies, the development of RE is a central vector in the NEP. Amongst the
strategy, acts, and main bye-laws, the following documents are the guiding principles for RE:
Renewable Energy Policy Guidelines (REPG), 2006
Renewable Energy Master Plan (REMP), 2012
National Renewable Energy and Energy Efficiency Policy (NREEEP), 2015
In May 2015, the Federal Executive Council approved the NREEEP [47]. This policy paper
would presumably replace the REMP. The NREEEP recognizes the importance of RE for on-
grid and off-grid systems. The document notes that the use of energy in the nation is far from
efficient at all levels including household, industry, and transport. It introduced the concept of
energy efficiency as a source of energy and incorporated the need to promote energy
conservation. [2]
PV Regulations 2.2.1
The Nigerian Electricity Market Rules are designed to establish and govern an efficient,
competitive, transparent and reliable market for the sale and purchase of wholesale
electricity and ancillary services in Nigeria and to ensure that the grid code and the market
rules are synchronized to secure efficient co-ordination and adequate participation in the
Nigerian electricity market. The main regulations applying to the development and operation
of a PV plant in Nigeria are as follows:
MYTO (Multi Year Tariff Order)
Transmission, Distribution and Metering Codes
Embedded Generation Regulations NERC, 2012
Regulation for Independent Electricity Distribution Network (IEDN), 2012
Regulations on the Procurement of Generation Capacities, 2014
Regulations on National Content Development, 2014
Mini Grid Regulations, 2017
The Eligible Customer Regulation, 2017
Support Mechanisms 2.2.2
It is important to note that support mechanisms (e.g. incentives) play a large role in the
economics of PV projects, especially since traditional power generating technologies are
gratified with ample direct and indirect subsidies. Support mechanisms for solar and other
types of RE can take many forms of direct subsidies, such as tax or investment credits or
favourable feed-in tariffs (FiTs). Many countries set strict criteria for new renewable projects
to qualify for financial support and Nigeria may not be an exemption.
Feed-in tariff (FiT) and MYTO
The FGN approved the FiT regulation in November 2015 and entered into force in February
2016. The tariff model was captured initially under the Multi-Year Tariff Order (MYTO) 2012
but has now been superseded by the Nigeria FiT for RE sourced electricity.
The FiT is applicable to all solar and wind-based power plants, all biomass
cogeneration power plants, irrespective of their sizes, and for small hydro schemes
33
not exceeding 30 MW. Its purpose is the reduction of costs associated in the negotiation
process of PPAs and to ensure a stable pricing policy. In addition, FiT provide added benefit
by the government because NBET is obliged to purchase 50% of the power generated by RE
plants and DisCos have the obligation to source the remaining 50%. While power plants
smaller than 30 MW are integrated automatically, RE projects bigger than 30 MW take part in
an auction (competitive bid process). Its procedures are defined by the FiT regulation.
Power Purchase Agreements
The involved authorities have developed an appropriate standard or model for PPAs. The
PPA sets the terms by which power is marketed and/or exchanged. It determines the delivery
location, power characteristics, price, quality, schedule, and terms of agreement and
penalties for breach of contract. It will among other things, ensure that prices provide an
adequate return on investments in renewable electricity; standardizes and simplifies
contractual relationships; and protects investors, utilities and consumers.
Regulatory and policy changes in the Nigerian energy sector since 2005 culminated in the
signing of 14 on-grid solar Power Purchase Agreements (PPAs) in 2016, between the
Nigerian government and several private investors. The completion of these PPAs would add
just about 1,200 MW to the national grid.
However, up to 2018 none of the 14 proposed projects have reached financial closure, which
is largely believed to be due to delays on the part of the NBET, which concern an acceptable
framework that satisfies financial houses and investors. [48]
On the potential of building on these PPAs and for more solar power companies to join the
process, the state of Nigeria’s transmission infrastructure has also been a major stumbling
block to the completion of deals, since it is a concern for developers and investors that
generated electricity may not be utilised, due to poor wheeling capacity of the transmission
infrastructure. There is good potential that this would improve, given that in January 2018
Nigeria announced a World Bank financed 20-year transmission infrastructure development
plan, which hopes to enhance the transmission infrastructure’s wheeling capacity from its
present capacity of 7,125 MW to 10,000 MW by the year 2020 and on to 28,000 MW by
2035. [49]
The 14 signed PPAs are listed in the table below:
Table 7: Solar Power Purchase Agreements signed in 2016
Company Installed Capacity State
Access Power (Quaint Abiba Solar Project) 50 MW Kaduna
Afrinergia Power 50 MW Nasarawa
Anjeed Innova 10 MW Kaduna
CT Cosmo’s 70 MW Plateau
En Africa 50 MW Kaduna
GreenWish Partners 100 MW Enugu
Kvk Power’s 100 MW Sokoto
LR Aaron Power 100 MW FCT-Abuja
Nova Scotia Power Development 80 MW Jigawa
34
Company Installed Capacity State
Pan Africa Solar & JCM Power 75 MW Katsina
Middle Band Solar One 100 MW Kogi
Motir DuSable 100 MW Nasarawa
Nigerian Solar Capital Partners 100 MW Bauchi
Nova Solar 5 100 MW Katsina
Source: Nigeria Electricity Hub; 2017 [50]
The procedure for tenders for PPAs is defined by NBET in a 5-step guide for competitive procurement [51]. NBET additionally offers a draft PPA for solar companies [52].
Tariff regulation
As per policy guideline, involved government authority must specify the terms and conditions
for the determination of tariff, and in so doing shall be guided by the promotion of renewable
energy sources in electricity production.
The process and calculation method for tariffs under the feed-in-tariffs are outlined by the
NERC in the document Regulations on Feed-in Tariff for Renewable Energy Sourced
Electricity:
For the Tariff Computation Method, the regulation stipulates:
a) The tariff schedule for the period starting from 2015 will be based on long range
marginal cost
b) These tariffs, where awarded to licensees shall last for the duration of the Power
Purchase Agreement (PPA)
c) The Commission (NERC) shall monitor uptake, considering the impact of each RE-
FiT in an annual tariff review. The resulting tariffs shall only be applicable to new
projects
d) New Generators shall be required to negotiate tariffs under market conditions
applicable at the time, which shall be applicable till the end of the contracted Re-FiT
tariff
For the Tariff Methodology, the Long Run Marginal Cost (LRMC) and Levelised Cost of
Energy (LCOE) shall be the methodology used to set the RE-FiTs for the qualifying Re-FiT
technologies. The methodology shall also allow the cost of capital and the operating cost of
the project to be recovered over the term of the PPA based on reasonable level of
output/capacity.
Regarding agreed tariffs under this model, the 14 PPA agreements signed with the NBET will
last 20 years and sell the power generated at 0.115 USD/kWh. From a consumer’s point of
view the NBET-agreed tariff seems high (and has represented a stumbling block to the
finalisation of the signed PPA agreements – see PPA chapter) but compared to the daily
costs incurred by consumers who rely on generators it appears price competitive.
Codes and Standards 2.2.3
The Nigerian electricity networks are governed by two main codes, the National Grid Code
for the Transmission System and the Distribution Code. For commercial operation of a power
plant, the Metering Code is another important document and it provides details on the limits
35
of supply and invoicing. All codes currently in force refer to related sections in the ESPRA
[53].
Transmission Code
The National Grid Code stipulates the conditions for the electricity transmission system in
Nigeria. According to the ESPRA of 2005 [54], the TCN is tasked to guarantee functioning
transmission system operations of the HV network and is responsible for overseeing the
operations. The code is the reference document for day-to-day operating procedures and
principles governing the development, maintenance and operation. It was designed with two
goals in mind: facilitating efficient production and supply of electricity for all users of the
transmission system and TCN itself, on the one hand, and on the other hand, enable
competition in the generation and supply of electricity in the country. Thus, it is mandatory for
all users of the transmission system, including TCN, to comply with these prescriptions. The
document was reviewed by the dedicated Grid Code Review Panel [55].
Distribution Code
Based on the EPSRA, the Distribution Code is the reference for all distribution networks
operating in the range from 240 V to 33 kV that operated by the DisCos. DisCos are
responsible for overseeing network operations and retail sales of electricity [56].
To support this function, the Distribution Code established a Distribution Code Review Panel
and regulates how unforeseen circumstances are to be handled. The first chapter highlights
the processes necessary during the distribution planning phase. These requirements include:
relevant planning data, planning documents, load forecasting, exigencies on distribution
planning and system studies. New additions or modifications of the grid are governed by
section 3. This process includes: connection agreements and showing ownership boundaries
(i.e. limits of supply). The most relevant part for the system designer is section 4, which
states the details of the requirements of the grid connection point including frequency,
voltage, protections and grounding, standards, requirements on generators with the
definitions of the connection point. The Distribution Code regulates operations including
planning, system texting and safety prescription and concludes with construction and
maintenance provisions. [2]
Metering Code
The last document that is regarded as essential for the development of a commercial project
is the Metering Code [57]. It covers metering in the transmission system and distribution
networks. It defines the conditions and requirements for electricity meters in the country. The
Metering Code defines the type and characteristics of the metering devices for developers
and owners of energy projects. The location of the meter is vital as it marks the commercial
limits of supply and defines where the responsibility for interconnection line losses lies. [2]
Any generation company with plans to sell electricity to the national grid or to DisCos
will need to apply for a generation license with NERC and for a Power Purchase
Agreement with NBET. Before a project reaches the license submission stage, a large
quantity of studies will need to be completed; meaning that the project developer or
investor must be prepared to partly incur substantial costs ahead of license approval
in the hope to gain such. The studies must obviously include a power evacuation study
(proving the viability of the grid connection) and an Environmental Impact Assessment (EIA). The EIA shall be prepared by a registered Nigerian company. Moreover, evidence
must be furnished that the TCN confirms that the proposed connection point has the capacity
36
to take the load to be fed into the grid. Compiling the legal & regulatory studies and the
financial modelling will also entail costs and time input.
Financing Situation for PV Power Plants 2.2.4
At present the funds available for PV power plants in Nigeria are so minimal that
developers need to find equity investors for investments. Debt financing, especially
with commercial banks and long-term loan tenors are difficult to find and expensive in
Nigeria, which makes solar investment options unviable. A solid financing option is the
Bank of Industry (BOI) which finances industrial and manufacturing projects at lower interest
rates for Nigerian companies. For most companies it is probably easiest to finance
investments with foreign loan credits.
Loan
The scheme described in Table 8, has been successfully used in the public and several
industrial sectors. Large RE power plants require high investment volumes and are difficult to
finance with private equity.
Table 8: Loan Conditions
Key Players Financial institutions and banks
Financial Terms
/Conditions Loan tenor: 15 (fifteen) years according to Bank’s initiative (for
large scale PV Plants)
Interest rate: 5%
Interest method: fixed
Debt/equity split: 25% equity.
Risks In the case of a cost overrun, the company must pay for the extra
costs without support through an additional loan.
Rights Feed-in Tariff for 15 years according to contracting situations
Obligations Payment of loans
Collateral: mortgage,
PV systems itself usually are not perceived as collateral by banks due to the lack of reliable second-hand market for PV panels. Hence, instead of collateralization of PV panels, they prefer to collateralize investor’s assets (on-balance sheet finance).
37
Key Players Financial institutions and banks
Investment Criteria Confirmation of an EPC firm authorized by a partner bank
Technical feasibility study
Suitable site conditions for PV installation
Sufficient share of production to meet the planned energy demand
The participatory banks require documents such as the electricity consumptions and the income structure of the investor to approve the loan.
Legal Requirements Project permission from a DisCo
Table 9: Advantages and Challenges, Loans
Advantages Challenges
Diversification of loans: Loans for small investments and rehabilitation, reconstruction of houses and new buildings.
Endorsement of an EPC firm by a partner bank
Feed-in tariff
Payments on production basis
Collateral: Financial condition of the investor
Volatility of Nigerian financial markets
Joint property rights lead to problems regarding the distribution of consumption and income rights.
Leasing
Leasing financing schemes involve two parties – the lessor (investor) and the lessee (user) –
who will sign a long-term leasing contract. The lessor (usually an electricity supply company)
purchases, installs and operates the PV system and the user (company) consumes the
generated electricity at a certain price or fee. The investor retains ownership of the system
throughout the duration of the contract.
Table 10: Leasing Financing Scheme
Key Players Key Players are the lessor (investor, usually an electricity supply
company), and the lessee (company)
Financial Terms /
Conditions
Lease contract durations vary between 7 to 25 years, depending on
the plant size and applicability.
Leasing rate: in most cases, the lessee pays a fixed monthly fee for
the PV electricity produced; yet, fees per consumed kWh are also
possible.
The leasing rate is usually fixed for the entire term of the lease, i.e. if
power supply prices rise, the lessee has an advantage.
At the end of the lease, the PV plant either becomes property of the
lessee, can be bought by the lessee or the lease can be renewed; this
depends on the terms of the initially negotiated contract.
38
Key Players Key Players are the lessor (investor, usually an electricity supply
company), and the lessee (company)
Risks The risks for the lessee are rather low, as the responsibilities
regarding the plant lie with the lessor (as laid out in the leasing
contract).
A risk that lies with the lessee is the possibility that he cannot
maximize his self-consumption to the necessary level to exceed the
leasing rate. Additionally, it is possible that the system does not
perform as expected or that the maintenance service is of poor quality.
In that case the lessee might face restrictions leading to termination of
the contract.
The lessor is responsible for planning, installing and running the plant
and bears all associated risks. Additionally, the lessor is also
responsible for service, insurance and maintenance and liable for any
damage. Therefore, in the case of irregularities, the lessee has the
right to demand for them to be fixed by the lessor
Obligations The lessee must pay the fees as stipulated in the contract.
Investment Criteria Fixed fee for the term of the contract (while the cost of power from the
grid might rise); sometimes the leasing fee is higher than the cost of
conventional electricity, but as the fee is guaranteed to remain stable,
leasing still represents an attractive financing scheme for some
lessees
Use of PV electricity without having to raise the funds for purchasing a
system
Legal Requirements Requirements contract between lessor and lessee
Table 11: Advantages and Challenges, Leasing
Advantages Challenges
Low level of risk
Stable rate throughout the duration of the contract
Forecasting the development of electricity prices
Maximizing the rate of self-consumption is the most economically viable business model.
Import conditions for PV 2.2.5
Following the federal government’s plan to achieve an installed electricity capacity of 35 GW
by 2020 and increase the share of renewable electricity generation to 36 % by 2030 [2],
efforts are being made to provide the right conditions for the actualisation of these ambitious
targets.
The National Renewable Energy and Energy Efficient Policy (NREEEP) as approved by the
Federal Executive Council (FEC) in May 2015 earmarked 5 percent duty rate for renewable
energy products with zero duty tariff. Notwithstanding, additional landing charges may apply
when importing RE products into the country. It is also important to take into consideration
the country’s 20 percent most favoured nation (MFN) tariff rate.
39
The following tariff applies to imported photovoltaic products according to Common External
Tariff (CET) Act No. 4 of the Nigeria Customs Service (NCS):
Solar cells, whether in modules or not, or made up into panels: 0 percent import duty
Batteries: 20 percent import duty / 5 percent VAT
Inverters: 5 percent import duty / 0 percent VAT
As part of the ongoing reform to revamp the energy sector, in August 2017, FEC approved
27 new infant industries eligible to enjoy the pioneer status incentive (PSI) with tax holidays
for a period not exceeding five years [58]. The PSI is a scheme to stimulate growth and
diversify investments in infant or non-existent sectors. It is governed by the Industrial
Development (Income Tax Relief) Act (IDIRA) which grants tax holidays to companies by
exempting their profits from taxation under the Principal Act being the Companies Income
Tax Act. The pioneer certification grants tax-free dividends and capital allowances after the
expiration of the tax holiday.
Security and Business Climate 2.2.6
Nigeria as the seventh most populous country in the world with an estimated 186
million people, is steadily expanding at a 2.6 percent growth rate according to the
International Monetary Fund [59]. The population is relatively young and youthful with an
average median age of 19.
The UN Department for Economic and Social Affair (UNDESA) forecast that Nigeria’s
population could reach 440m people by 2050 thus overtaking the United States as the
third most populous country in the world. Given these realities, provision of adequate security
for lives and properties, and creating an enabling environment for businesses to thrive are
two major tasks that the current administration is saddled with.
Business Climate
According to the World Bank Doing Business Report 2017, Nigeria ranks 169 out of 190
economies of the world and ranked 44 out of 60 in 2016 considering access to credit.
The 1995 Nigerian Investment Promotion Commission (NIPC) Act permits foreign investors
to partial or full ownership of businesses in Nigeria. In accordance to stipulated exchange
control regulations and requirements, investors can import capital and freely repatriate
profits. However, in some sectors of the economy namely: oil and gas, mining,
telecommunications, aviation etc., specific ownership licenses and restrictions are required
for operations:
NIPC was set-up with the mandate of promoting Nigeria as the ideal destination for
foreign direct investments. It ensures a conducive business environment for potential
investors by removing bottlenecks and simplifying administrative procedures involved with
registering new entrants or businesses.
The Nigerian Export Processing Zone Authority (NEPZA) under the aegis of Federal Ministry
for Industry, Trade and Investment (FMITI) has established 34 Free Trade Zones with over
300 licenced Free Zone enterprises spread across the nation e.g. Lekki Free Trade Zone,
Tinapa Free Zone and Tourism Resort, Kano Free Zone, LADOL Free Zone, Olokola Free
Trade Zone etc. to stimulate foreign direct investments and accelerate the pace of economic
growth in the country. Privileges that registered Free Trade Zones enterprises enjoy
includes: exemption from all federal, state, and local government taxes incl. levies and rates,
100 percent capital and profit repatriation, and waivers on customs and import duties.
40
The Office of the Presidency formed a Presidential Enabling Business Environment Council
(PEBEC) chaired by the Vice-President with selected Heads of Ministries, Departments and
Agencies (MDAs), the Central Bank of Nigeria (CBN) governor, Head of Civil Service of the
Federation and other key stakeholders from the private sector in July 2016. Since inception,
PEBEC has initiated various economic reforms – the most notable being a 60 Day National
Action Plan on Ease of Doing Business in Nigeria – to ensure synergy and transparency
among MDAs, improve product and service delivery, thereby creating a conducive business
environment.
In February 2017, Nigeria’s foreign missions commenced a 48-hour visa issuance and visa
on arrival (i.e. business and tourism) programmes to ensure seamless entry and exit of
potential investors and/or goods into the country, in compliance to a directive from the federal
government.
Abuja and Lagos international airports have received infrastructural upgrades in recent times. Several other projects are being implemented to develop the country's ailing
infrastructure especially in power (off-grid and rural electrification), gas exploration,
transportation and aviation.
Business vehicles
Common business vehicles are sole proprietorship, partnership (from 2 – 20 partners),
company (with USD 50,000 minimum capital share depending on the sector), free trade
zones.
Established by the Companies and Allied Matters Act 1991, the Corporate Affairs
Commission (CAC) is the autonomous regulator and supervisor of companies’
formation and incorporation in Nigeria. It offers administrative services to new and
existing businesses. In 2016, the commission included an online application feature on its
website to fast-track the business registration process. This has helped to streamline the
process and improve efficiency. In Lagos, a company would get registered in 25 days
considering ongoing reforms, this should get done in two days [60].
Once a limited liability company is established, an official certificate of capital importation is
required especially for repatriation of profit. Foreign investors must also obtain import-export
licence from the Nigeria Customs Service (NCS).
Security
Conflict is a common occurrence in human society and Nigeria is no exception. Physical and
structural conflicts raging from the jihadist Boko Haram insurgency, pipeline vandalism and
indiscriminate kidnapping of oil-workers in Niger Delta, cattle rustling across the Benue, and
to the agitation for secession in the South-East etc. are major threats to the nation’s stability
and economic wellness.
Piracy is another common occurrence along the Gulf of Guinea. The International Maritime
Bureau stated that the number of pirate attacks off the coast of Nigeria has drastically
increased in 2016.
In response to Boko Haram’s inhumane operations in the Lake Chad Basin and the north-
east regions: Borno, Yobe, and Adamawa states, the federal government has beefed up
security measures in the region with military intervention and improved medical care and
provision of shelters for displaced persons in the region.
In collaboration with its neighbouring countries, Nigeria has formed a military coalition called
“The Multinational Joint Task Force” which includes soldiers from Benin, Chad, Nigeria, Niger
and Cameroun to counter the onslaught of the terrorist group.
41
The Nigeria Airforce has seen increased advisory and machinery supports from the
international community (Russia, the United States of America, Pakistan and the United Arab
Emirates) and these have helped to boost its capacities and strengthen its ranks against the
Boko Haram.
International aid agencies e.g. Doctors Without Border, the Red Cross etc. and the UN
Security Council have pledged allegiance to supporting the government in the struggle for
peace in the affected areas.
Anti-graft Campaign
The All Progressive Congress (APC) rode to victory in the 2015 general elections on a
number of key campaign pledges among which good governance and anti-corruption stood
tall and distinct [61]. Given this precedence, Buhari’s administration has been characterized
by efforts to curb corruption and organised crimes in the country using its anti-graft agencies
particularly the Economic and Financial Crimes Commission (EFCC) and the Independent
Corrupt Practices and other Related Offences Commission (ICPC).
Since he assumed office, he has introduced governance reforms to check graft at all levels of
government with many high-profile figures in the public sector already been investigated and
arrested for criminal charges such as money laundering, bribery etc. Among other things,
however, his administration will also look at improving good governance and transparency
among its various ministries, agencies and parastatals against the backdrop of the country’s
recent performance (ranked 136 out of 176 countries) in the 2016 Corruption Perception
Index released by Transparency International.
In August 2017, his administration signed an Extradition Agreement with the United Arab
Emirate (UAE) to expedite mutual legal assistance between both countries with respect to
criminal cases and recovery of stolen public funds in the region [62].
In the same vein, the Federal Ministry of Finance launched a whistle-blowing programme to
increase exposure of financial crimes, theft and fraud, mismanagement of public funds and
assets, and other related financial malpractices through public engagement and participation
in the fight against corruption.
Customer Segments for Solar PV 2.3
The potential of the Nigerian PV market is divided into the residential and industrial sector.
Most private households are characterized by a low energy consumption, whereas many
industrial companies have high energy consumption and are looking for a reliable energy
supply for their production. RE technologies are characterized by high initial investment costs
(CAPEX) and rather low operating costs (OPEX). Facilitating and securing financing is
therefore perceived as one of the key challenges to the growth of RE technologies in Nigeria.
The lack of adequate public funding has been a major setback in the growth of PV and
other renewable energy technologies in Nigeria. For example, the modest percentage of
federal budget dedicated to the education, science and technology ministries is discouraging.
Productive research and development activities could not be started or supported with the
meagre budgets allocated to these ministries. Corporate actors also need to be encouraged
to collaborate with research institutions in order to co-finance research aimed at developing
solar energy. The required research includes the elaboration of an adequate national solar
atlas providing crucial information for a nationwide solar energy resource assessment. Such
a basic tool is urgently needed to determine the commercial feasibility and viability of solar
energy generation and prerequisite to sound investment decision making. Furthermore, the
42
efforts required to establish national solar PV testing and certification schemes also require
public support because they overburden the small national solar industry’s resources.
Industrial Clusters 2.3.1
Industrial conglomerates are perceived as promising targets for the development of
PV in Nigeria: these clusters are made of companies whose main concern may less be a
lack of capital but rather a reliable and stable access to electricity for securing stable
production.
The Nigeria Industrial Revolution Plan (NIRP) was designed to facilitate the development of
industrial cities, parks and clusters by focusing on making civil infrastructure available within
these industrial zones. However, the development of these industrial zones requires the
consideration of environmental protection measures to which RE can greatly contribute.
Furthermore, most of these industrial zones are dominated by SMEs so that solar PV should
thrive very well in these environments. Some relevant industrial clusters are presented
below:
Nnewi Automotive Parts Industrial Cluster
Nnewi, the second largest city in Anambra State (South-East Nigeria), has positioned itself
as a major manufacturing hub in Africa. It is home to many indigenous manufacturing
companies such as Ibeto Group, Cutix Plc, Uru Industries Ltd, Omata Holdings, Innoson
Group, Tomy Group, Chicason Group, and many more. The Nnewi Automotive Parts
industrial cluster is a huge success story in Nigeria. Its key critical success factors include
active participation of private industry associations such as Nnewi Chamber of Commerce,
Industry, Mines and Agriculture and the Nigerian Association of Small-scale Industries, a
social-cultural milieu characterized by competitiveness. Such industrial zones have a
common challenge when it comes to electricity to drive their heavy-duty machines due to the unreliability of the grid. Hence, very paramount is the need for a captive diesel hybrid solar
PV or off grid solar PV.
Firms in Nnewi grew despite major infrastructural and credit constraints. Electricity, for
example, was only supplied through private generators and banks were reluctant to extend
the level of credit offered to companies with high inventory costs. Despite all these
limitations, Nnewi firms succeeded in innovating, growing and exporting their products to
neighbouring communities. Much more success will be recorded if there is a huge
deployment of solar PV technology to proffer a lasting solution to power supply in the zone.
Otigba Computer Village
The Otigba Computer Village was developed in 1995 in Ikeja, Lagos and provides for the
sale, service and repair of Information and Communication Technology (ICT) products and
components, particularly to the Lagos industrial base. Consequently, the need for a constant power supply cannot be overemphasized. These SMEs require supply of electricity which
will be most convenient via off-grid roof top solar home systems to power their
computers and related equipment. Increasingly, the Otigba cluster is meeting West African
market demand with some 392 SMEs employing more than 3,000 people. The cluster
development has been characterized by significant inter-firm cooperation and joint action.
In the meantime, co-operation has been particularly noticeable in dealing with government’s
treatment of the cluster, where the Computer and Allied Products Association of Nigeria
(CAPDAN) has been very active. The support of government through property access, rental
and licensing, as well as refrain from heavy handed inspection, licensing practices and other
43
areas of significant cooperation relate to technology and market support, security, and
infrastructure maintenance. With solar PV investors drive, the cluster will experience more
business boom through improved electricity supply.
Onitsha Plastic Cluster
The plastic cluster in Onitsha is known as the Osakwe industrial cluster. It is situated at
Awada layout in Onitsha and has about 75 businesses employing over 1,800 people. Onitsha is a very dynamic city and has the highest concentration of manufacturers in
Eastern Nigeria with products ranging from plastic film extrusion, plastic pipe extrusion,
plastic injection, plastic blow moulding, polythene bag making, and plastic waste recycling. It
attracts trading partners from the rest of the country and different parts of the West African
sub-region. This area will witness a huge development if solar PV technology is adopted for
electricity supply infrastructures, be it off grid or embedded solar PV generation. Presently,
the industries are managed by the Industrial Economy Development Agency, a local group
that provides planning, research & development, infrastructure, security, and training to
members of the cluster. There are also free services, workshops, machine development and
building company in this cluster.
Free Trade Zones 2.3.2
In addition to industrial clusters, free trade zones may also be a promising target for the
development of solar PV as they have similar needs as industrial clusters with regards to the
provision of reliable power supply. A free trade zone is an area where goods may be landed,
handled, manufactured or reconfigured, and re-exported without the intervention of the
customs authorities. Only when the goods are moved to consumers within the country in
which the zone is located, they become subject to the prevailing customs duties.
The Nigerian Export Processing Zones Authority is the agency responsible for promoting and
facilitating local and international investments into free trade zones in Nigeria.
Table 12: Free Trade Zones in Nigeria
Name Location Developer Land Size (ha) Status
Calabar Free Trade Zone (CFTZ)
Cross River Federal
Government 220 Operational
Kano Free Trade Zone (KFTZ)
Kano Federal
Government 463 Operational
Tinapa Free Zone & Resort
Cross River PPP 265 Operational
Snake Island Lagos Nigerdock Plc. 59.42 Operational
International Free Zone
Maigatari Border Free Zone
Jigawa State
Government 214 Operational
Airline Services EPZ Lagos Private n/a Operational
Sebore Farms EPZ Adamawa Private 2,000 Operational
44
Name Location Developer Land Size (ha) Status
Ogun Guandong FTZ Ogun PPP 10,000 Operational
Lekki Free Zone Lagos State Government
n/a Operational
Abuja Tech Village FZ FCT Abuja FCT 702 Under construction
Ibom Science & Tech FZ
Akwa Ibom State Government
122.14 Operational
Lagos Free Trade Zone
Lagos Eurochem Technology
218 Operational
Olokola Free Trade Zone
Ondo & Ogun PPP 10,500 Operational
Living Spring Free Zone
Osun State Government
1,607.86 Under construction
Badagary Creek Integrated Park
Lagos Kaztec Engineering
531 Under construction
Ogindigbe Gas Revolution Industrial Park (GRIP)
Delta Alpha GRIP Development
Co.
2,506.03 Under construction
Nigeria Aviation Handing Co. (NAHCO)
Lagos NAHCO 10 Under construction
Nigeria International Commerce City
Lagos Eko Atlantic FZ Ltd
1,000 Under construction
Ogogoro Industrial Park
Lagos Digisteel 52 Under construction
Ondo Industrial City Ondo State Government
2,771.2 Under construction
Source: Nigeria Export Processing Zones Authority; 2017 [63]
45
3. Selected PV Business Models
This section is dedicated to the profitability analysis of four selected PV business models.
Sample calculations of typical projects include: cash-flow modelling and sensitivity analyses
to provide an outlook of profitability changes related to changes in system prices, energy
yield and remuneration.
Large Scale PV (25 – 50 MWp) 3.1
Large scale photovoltaic systems (PV systems). which also known as solar parks, are
designed to supply power to the electricity grid. They are differentiated from most building-
mounted and other decentralized solar power applications because they supply bulk power
at the utility level, rather than to a local user. Large scale PV plants generally are the type of
projects which most investors and developers invest in. The off-takers of bulk solar power
are generally large power utilities. The main off-taker in Nigeria is NBET.
Profitability Analysis (Inputs, Outputs, Scenarios, Sensitivities)
A profitability analysis for a large-scale PV project based on a PPA is presented below.
Figure 5: Project Overview - Large Scale PV
Source: eclareon; 2017 [64]
All cash flows including financing are assumed to be in USD because the PPA price as
single source of revenue is paid in USD. Therefore, interest rates and inflation rate are also
USD based.
PV Project PV Business Model
PV System Size kWp 50.000 PPA Tariff 100% USD/kWh 0,1150
Specific System Cost USD/kWp 1.000 Fees USD/kWh -
Investment Subsidy USD - Overysupply Price USD/kWh -
Total System Cost USD 50.000.000 Undersupply Penalty USD/kWh -
Fixed Operation Costs USD p.a. 1.500.000 Inflation Adjustment % -
Variable Operation Costs USD/kWh -
PV Generation
Yield kWh/qm/a 2.000 Net-Present Value USD 5.342.131
Performance Factor % 82% Project IRR % 11,75%
Specific Yield kWh/kWp/a 1.640 Equity IRR % 15,99%
Degradation % p.a. 0,70% Payback Period Years 12,89
LCOE (no subsidy) USD/kWh 0,10
Min DSCR** x 1,12 x
Project Duration Years 20 Min LLCR*** x 1,12 x
Equity USD 12.194.463
Debt (Gearing) 80% USD 40.000.000
Loan Tenor Years 10
Interest Rate % 9%
Discount Rate % 12%
Inflation Rate (USD) % 2% * LCOE: Levelized Cost of Electricity
** DSCR: Debt Service Coverage Ratio
*** LLCR: Loan Life Coverage Ratio
Results
Investment
46
Figure 6: Equity Cash Flow - Large Scale PV
Source: eclareon; 2017 [64]
Due to module degradation and missing inflation adjustment for the PPA price, the yearly
cash flows for equity are gradually reduced. The sudden increase after year 12 is caused by
the end of the debt tenor and the full reimbursement of the loan.
Figure 7: Project Cash Flows - Large Scale PV
Source: eclareon; 2017 [64]
O&M costs are only escalated with the relatively low USD inflation, since the revenues are
also in USD and it is assumed that O&M will be contracted and paid in USD as well.
47
Figure 8: Specific Yield Sensitivity - Large Scale PV
Source: eclareon; 2017 [64]
Figure 9: System Price Sensitivity - Large Scale PV
Source: eclareon; 2017 [64]
The profitability of PPA projects is strongly influenced by the yield and the system price
because of their strong impact on revenues and overall costs.
2,7
4,3
8,8
12,9
18,8
12,9
43%
32%
24%
18%
14%
10% 7%
5%
16%
600 700 800 900 1.000 1.100 1.200 1.300 1.400
System Price [USD/kWp] Amortization [a] Equity IRR [%] Base Case
48
Figure 10: Interest Rate Sensitivity - Large Scale PV
Source: eclareon; 2017 [64]
Since compared to the other examples, the debt leverage with 80% is quite high and the debt
tenor with 10 years quite long, we see a strong impact of the interest rate as well.
Figure 11: PPA Price Escalation Sensitivity - Large Scale PV
Source: eclareon; 2017 [64]
In the base case, no PPA price escalation has been assumed. However, via the
sensitivity the impact of an inflation adjustment can be assessed.
4,7
6,2
10,0
11,8
14,2
17,8
12,9
26%
23%
20%
17%
15%
12%
10% 8%
16%
0% 2% 4% 6% 8% 10% 12% 14% 16% 18%
Interest Rate [% p.a.] Amortization [a] Equity IRR [%] Base Case
12,4 11,6
10,9 10,3 9,5
8,4 7,6
12,9
16% 17%
19% 20%
21% 23%
24% 25%
16%
0,0% 0,5% 1,0% 1,5% 2,0% 2,5% 3,0% 3,5% 4,0%
PPA Price Escalation [% p.a.] Amortization [a] Equity IRR [%] Worst Case
49
Embedded PV systems (1 – 5 MWp) 3.2
Embedded generation is power that is obtained using a power generator, which is connected to a distribution network, that is operated by the Distribution Company (DisCo) and licensed by the Nigerian Electricity Regulatory Commission. The generators are directly connected to or are near the load centre of the distribution network. Embedded generation ensures that the power generated is utilized locally and supplied to eligible customers.
If embedded generation units are to be connected to the distribution network, this must be done according to the Distribution Code. Table 13 shows different licensing definitions according to NERC. The regulation dictates that the licensee enters various network agreements such as PPAs, connection/interface agreements, use of network agreements, and ancillary services agreements with the relevant authorities, such as NERC and NBET.
Table 13: Embedded Generation - Licensing Definitions
Rated Capacity Connection Voltage Level
Small units with 1–6 MW 11 kV medium distribution voltage
Large units with 6–20 MW 33 kV medium distribution voltage
≥ 20 MW 33 kV medium distribution voltage for every 20 MW being evacuated
Source: NERC; 2012 [65]
Profitability Analysis (Inputs, Outputs, Scenarios, Sensitivities)
Figure 12: Project Overview - Embedded PV
Source: eclareon; 2017 [64]
PV Project PV Business Model
PV System Size kWp 2.000 Self-Consumption Rate % 100%
Specific System Cost NGN/kWp 430.000 Electricity Price NGN/kWh 45
Investment Subsidy NGN - Fees NGN/kWh -
Total System Cost NGN 860.000.000 Elecitricity Price Escalation % 10%
Fixed Operation Costs NGN p.a. 25.800.000
Variable Operation Costs NGN/kWh -
PV Generation
Yield kWh/qm/a 1800 Net-Present Value NGN 513.116.737
Performance Factor % 82% Project IRR % 20%
Specific Yield kWh/kWp/a 1.476 Equity IRR % 22%
Degradation % p.a. 0,70% Payback Period Years 10,2
LCOE (no subsidy) NGN/kWh 64
Min DSCR** x 1,06 x
Project Duration Years 25 Min LLCR*** x 1,25 x
Equity NGN 448.492.564
Debt (Gearing) 50% NGN 430.000.000
Loan Tenor Years 5
Interest Rate % 9%
Discount Rate % 15%
Inflation Rate % 10% * LCOE: Levelized Cost of Electricity
** DSCR: Debt Service Coverage Ratio
*** LLCR: Loan Life Coverage Ratio
Results
Investment
50
Above an exemplary profitability analysis for an embedded PV project based on grid
electricity price savings is presented.
All cash flows are considered in NGN. Thus, an average inflation rate of 10% is assumed for
the project period. The yield is assumed lower to account for usually lower irradiation in more
densely populated areas compared to more remote, ground-mounted installations. Although
it is planned to keep electricity prices stable in coming years, prices have still been increased
recently. This is why a price escalation in the range of the inflation rate is assumed. The debt
interest rate is assumed to be 9% which corresponds to the interest rate of the MSME facility.
This interest rate will also be used in all subsequent examples to improve comparability.
Figure 13: Equity Cash Flows - Embedded PV
Source: eclareon; 2017 [64]
Payback is achieved around year 10 for the investor due to the high electricity price and its
escalation. Debt is repaid quickly within 5 years due to the low leverage of 50%. After 5
years, all cash flows after costs flow back to the investor.
51
Figure 14: Project Cash Flows - Embedded PV
Source: eclareon; 2017 [64]
Since the electricity price escalation is set to be at the general inflation rate, revenues go up
significantly in the later stages of the project.
Figure 15: Specific Yield Sensitivity - Embedded PV
Source: eclareon; 2017 [64]
21,0
15,4
12,2
10,2
8,7 7,7
6,8
10,2 14%
17%
19%
21%
23% 26%
28% 30%
22%
800 1.000 1.200 1.400 1.600 1.800 2.000 2.200
Specific Yield [kWh/kWp/a] Amortization [a] Equity IRR [%] Base Case
52
Figure 16: System Price Sensitivity - Embedded PV
Source: eclareon; 2017 [64]
As already shown by the previous example, the yield and the system price have a strong
impact on the profitability of a project.
Figure 17: Electricity Price Escalation Sensitivity - Embedded PV
Source: eclareon; 2017 [64]
After recent steep price increases, the electricity price should remain stable for the coming
years according to the electricity market authority. However, for the long-term, an average
6,0 7,2
8,6
10,2
12,0
14,1
16,7
10,2
33%
29%
26%
23% 21%
19% 18%
16%
22%
250.000 300.000 350.000 400.000 450.000 500.000 550.000 600.000
System Price [NGN/kWp] Amortization [a] Equity IRR [%] Base Case
14,0
11,1
9,5 10,2
4%
11%
16%
19%
22%
25%
22%
-4% -2% 0% 2% 4% 6% 8% 10% 12% 14%
Electricity Price Escalation [% p.a.]
Amortization [a] Equity IRR [%] Up Case
53
price increase of 10% has been assumed. As the sensitivity underlines, actual price
increases have a strong impact on project economics.
Figure 18: Interest Rate Sensitivity - Embedded PV
Source: eclareon; 2017 [64]
Since the debt leverage is only assumed to be at 50%, the interest rate has a reduced impact
on profitability of a project compared to the previous example which had an 80% debt
leverage.
Captive Diesel-PV hybrid (100 kWp – 1,5 MWp) 3.3
A solar PV diesel hybrid system combines the power output of PV arrays and diesel
generators. The control system draws power in such a way that it maximizes the load
contribution of PV and minimizes diesel generators. If there are multiple generators and there
is sufficient power from PV, the control system will shut off some of the generators
completely to minimize fuel consumption.
In Nigeria, captive power is a widespread form of off-grid power generation. In the EPSRA
2005, the NERC defines captive generation as power generating infrastructures of capacities
above 1 MW, where the electricity is consumed by the generating entity itself and not sold to
third parties.
9,0 9,3 9,7 10,0 10,4 10,7 11,1 11,5
10,2
24% 23% 23% 23% 22% 22% 21% 21% 22%
0% 2% 4% 6% 8% 10% 12% 14% 16% 18%
Interest Rate [% p.a.] Amortization [a] Equity IRR [%] Base Case
54
Figure 19: Schematic view of a PV / diesel hybrid system for rural electrification
Source: IEA-PVPS T9; 2013 [66]
Figure 5 above indicates the setup of a PV diesel hybrid systems for rural off-grid
electrification.
Profitability Analysis (Inputs, Outputs, Scenarios, Sensitivities)
Figure 20: Project Overview - Captive PV
Source: eclareon; 2017 [64]
Above an exemplary profitability analysis for a captive PV diesel hybrid project based on
diesel savings is presented. The captive diesel project is also calculated in NGN since the
PV Project PV Business Model
PV System Size kWp 100 Consumption via PV Battery % 55%
Specific System Cost NGN/kWp 500.000 Direct PV consumption % 40%
PV Battery Size kWh 100 Battery Losses % 10%
Specific Battery Costs NGN/kWh 100.000 Diesel Generation Costs NGN/kWh 71
Total System Cost NGN 60.000.000 Fuel cost escalation % p.a. 7%
Fixed Operation Costs NGN p.a. 2.100.000
Variable Operation Costs NGN/kWh -
PV Generation
Yield kWh/qm/a 2000 Net-Present Value NGN 4.782.401
Performance Factor % 82% Project IRR % 15%
Specific Yield kWh/kWp/a 1.640 Equity IRR % 16%
Degradation % p.a. 0,70% Payback Period Years 16,73
LCOE (no subsidy) NGN/kWh 91
Min DSCR** x 1,05 x
Project Duration Years 25 Min LLCR*** x 1,15 x
Equity NGN 31.245.740
Debt (Gearing) 50% NGN 30.000.000
Loan Tenor Years 5
Interest Rate % 9%
Discount Rate % 15%
Inflation Rate % 10% * LCOE: Levelized Cost of Electricity
** DSCR: Debt Service Coverage Ratio
*** LLCR: Loan Life Coverage Ratio
Results
Investment
55
revenues are generated from diesel savings which are assumed to be paid in NGN. The yield
is higher due to the most likely higher irradiation in off-grid locations.
Figure 21: Equity Cash Flows - Captive PV
Source: eclareon; 2017 [64]
The captive diesel-PV case assumes two battery replacements, one in year 8 and one in
year 16, with decreasing costs because the present value of those investments is considered
and future cost reductions are very likely.
Figure 22: Project Cash Flows - Captive PV
Source: eclareon; 2017 [64]
In this case the inflation rate (10%) applied to the O&M costs is higher than the fuel cost
escalation (7%) that drives the increased savings over time. Thus, towards the end of the
project the absolute O&M costs increase more than the revenues/savings.
56
Figure 23: Specific Yield Sensitivity - Captive PV
Source: eclareon; 2017 [64]
Figure 24: System Price Sensitivity - Captive PV
Source: eclareon; 2017 [64]
The yield and the system price have a strong impact on the profitability of a project.
16,7
12,3
10,1
8,7
16,7
6%
9%
12%
15%
18%
20%
22%
25%
16%
1.000 1.200 1.400 1.600 1.800 2.000 2.200 2.400
Specific Yield [kWh/kWp/a] Amortization [a] Equity IRR [%] Base Case
6,6
9,6
12,2
16,7 16,7
28%
24%
20%
18%
15% 13%
11% 9%
16%
350 400 450 500 550 600 650 700 750 800 850
Tausende
System Price [T NGN/kWp] Amortization [a] Equity IRR [%] Base Case
57
Figure 25: Fuel Cost Escalation Sensitivity - Captive PV
Source: eclareon; 2017 [64]
The rate at which the fuel costs are escalated over the project period has a strong impact on
the profitability of the project.
Figure 26: Interest Rate Sensitivity - Captive PV
Source: eclareon; 2017 [64]
Since the debt leverage is only assumed to be at 50%, the interest rate has a reduced impact
on profitability of a project compared to the PPA project which had 80% debt leverage.
16,7
12,5
10,7
16,7
10%
14%
18%
21%
24%
16%
-4% -2% 0% 2% 4% 6% 8% 10% 12% 14%
Fuel Cost Escalation [% p.a.]
Amortization [a] Equity IRR [%] Up Case
13,4 14,0
14,8
16,3 17,2
18,3 19,6
21,1
16,7
18% 17% 17% 17% 16% 16% 15% 15% 16%
0,0% 2,0% 4,0% 6,0% 8,0% 10,0% 12,0% 14,0% 16,0% 18,0%
Interest Rate [% p.a.] Amortization [a] Equity IRR [%] Base Case
58
Off-Grid Generation 3.4
Off-grid generation is power generation with no connection to the local distribution network or
the transmission grid. Power generation can be based on a Solar Home System (SHS) or on
a larger scale to supply a PV mini grid.
Off-grid PV systems often are battery based solar power plants. During the day the system
uses the solar power generated and stores the energy left over in a battery bank. The
storage system provides a buffer and thus flexibility, allowing for optimal use of the
generated solar power.
Figure 27 shows the typical load curve of a rural community. It is generally composed of a
prominent peak in the evening corresponding to lighting use, a defined morning/midday load,
and a base load during night time. In many cases, the peak load is two to five times higher
than the base load.
Figure 27: Typical Load Profile in Rural Areas
Source: IEA-PVPS T9; 2013 [66]
Solar Home Systems (SHS) 3.4.1
Solar Home Systems (SHS) are stand-alone, standardized PV systems that offer a cost-
effective mode of producing power for remote off-grid households and other off-grid
consumers. SHS solutions are particularly important for rural off-grid areas where a grid
connection cannot be established quickly and cost effectively, and many of these areas exist
in Nigeria. A SHS typically includes one or more PV modules, a charge controller and a
battery system to store energy for periods without sun. To supply AC appliances, they may
also include an inverter.
SHS usually provides power for low power DC/AC appliances such as mobile phones, small
batteries, lights, radios and TV sets during the day and, if coupled to a battery, for several
hours during the night.
Besides providing private households in remote areas with electricity, SHS systems can also
generate electricity for small non-profit facilities such as health stations where they power
refrigerators for vaccines and medicines.
59
Off-Grid PV (10 – 250 kWp) 3.4.2
Off-grid PV in the form of a PV power plants with a local AC distribution network (mini grid)
mostly scale between 10 – 250 kWp and usually include battery systems for energy storage.
The systems are mostly used where extending the grid is not economically attractive but
where communities live in established villages with houses in the proximity.
Profitability Analysis (Inputs, Outputs, Scenarios, Sensitivities)
The following shows the profitability analysis of an off-grid PV mini grid project based on
electricity sales to consumers.
Figure 28: Project Overview - Off-grid PV Mini Grid
Source: eclareon; 2017 [64]
Different types of customers are connected to the mini grid. The anchor client has the highest
priority and thus pays the highest price because of his high requirements for reliability of
supply (e.g. telecom tower company). Small commercial and residential customers have
lower requirements and thus benefit from lower prices. In order to offset increasing O&M
costs due to the high inflation, the electricity price gets escalated by 7% per year.
The PV consumption that goes through the battery is reduced by 10% to account for losses
during the battery storage process. 40% of the PV electricity is consumed directly. Additional
5% are lost due to lack of consumption and yet fully loaded batteries during periods of high
irradiation.
PV Project PV Business Model
PV System Size kWp 100 Consumption via PV Battery % 55%
Specific System Cost NGN/kWp 600.000 Battery Losses % 10%
PV Battery Size kWh 400 Direct PV Consumption % 40%
Specific Battery Cost NGN/kWh 100.000 Price A (Anchor Client) 50% NGN/kWh 140
Total System Cost NGN 100.000.000 Price B (Commercial) 30% NGN/kWh 120
Fixed Operation Costs NGN p.a. 3.500.000 Price C (Households) 20% NGN/kWh 120
Variable Operation Costs NGN/kWh - Price Escalation % p.a. 7%
PV Generation
Yield kWh/qm/a 2000 Net-Present Value NGN 20.218.975
Performance Factor % 82% Project IRR % 17%
Specific Yield kWh/kWp/a 1.640 Equity IRR % 18%
Degradation % p.a. 0,70% Payback Period Years 12,91
LCOE (no subsidy) NGN/kWh 154
Min DSCR** x 1,17 x
Project Duration Years 25 Min LLCR*** x 1,29 x
Equity NGN 52.150.298
Debt (Gearing) 50% NGN 50.000.000
Loan Tenor Years 5
Interest Rate % 9%
Discount Rate % 15%
Inflation Rate % 10% * LCOE: Levelized Cost of Electricity
** DSCR: Debt Service Coverage Ratio
*** LLCR: Loan Life Coverage Ratio
Results
Investment
60
Figure 29: Equity Cash Flows - Off-grid PV Mini Grid
Source: eclareon; 2017 [64]
Investments to replace the battery are made in year 8 and year 16. Future battery
investments are discounted to their present value. Also, reduced costs are assumed due to
technological advancements.
Figure 30: Project Cash Flows - Off-grid PV Mini Grid
Source: eclareon; 2017 [64]
High O&M costs towards the end of the project duration are caused by the 10% inflation rate
per year over 25 years.
61
Figure 31: Specific Yield Sensitivity - Off-grid PV Mini Grid
Source: eclareon; 2017 [64]
Figure 32: System Price Sensitivity - Off-grid PV Mini Grid
Source: eclareon; 2017 [64]
As in the previous examples above, the yield and the system price have a strong impact on
the profitability of a project.
18,7
12,9
10,4
8,8
6,6
12,9
8%
11%
14%
17%
20%
22%
25%
27%
18%
1.000 1.200 1.400 1.600 1.800 2.000 2.200 2.400
Specific Yield [kWh/kWp/a] Amortization [a] Equity IRR [%] Base Case
5,7
8,4
10,3
12,9
17,5
12,9
31%
26%
23%
20%
17% 15%
13% 11%
18%
600 700 800 900 1.000 1.100 1.200 1.300 1.400
Tausende
System Price [T NGN/kWp] Amortization [a] Equity IRR [%] Base Case
62
Figure 33: Electricity Price Escalation Sensitivity - Off-grid PV Mini Grid
Source: eclareon; 2017 [64]
Since the electricity sales to consumers connected to the mini grid are the main source of
revenue, the price escalation applied to the electricity prices plays a key role.
Figure 34: Interest Rate Sensitivity - Off-grid PV Mini Grid
Source: eclareon; 2017 [64]
Since the debt financing only amounts to 50% of the total investment costs, the impact in
changes to the interest rates has a reduced impact compared to the 80% debt used in the
PPA project.
20,8
12,9
10,8 9,5
12,9
3%
12%
17%
20%
23%
26%
18%
-4% -2% 0% 2% 4% 6% 8% 10% 12% 14%
Electricity Price Escalation [% p.a.]
Amortization [a] Equity IRR [%] Up Case
11,1 11,6 12,1 12,6 13,2
13,9 14,5
15,8
12,9
20% 19% 19% 19% 18% 18% 17% 17% 18%
0,0% 2,0% 4,0% 6,0% 8,0% 10,0% 12,0% 14,0% 16,0% 18,0%
Interest Rate [% p.a.] Amortization [a] Equity IRR [%] Base Case
63
4. Success Factors for Developing PV Power Plants
The success factors for developing a PV power plant are divided into optimum power plant
design, project implementation, commercial and financing aspects.
Depending on the chosen PV segment, it is important to understand the required design,
implementation and financial requirements of each project. Costs for PV plants are
decreasing, making solar power more competitive. However, it is necessary to understand
the power purchase agreements offered in various environments to optimize the cash flow of
a project.
Lastly, there are several risks and mitigation measures that should be understood by the
investor, developer and operator of each plant.
The following chapters provide a description of the success factors for developing PV power
plants.
Status and outlook on most profitable PV segments 4.1
In general, it can be stated that due to the recent and ongoing cost reduction for PV systems
there is a good (and increasing) chance for PV plants to be competitive. Nevertheless, it is
hard to say which types of PV power plants are most profitable. Any decision on which type
of PV plant is most suitable and profitable for any situation must be based on case by case
analysis.
Figure 35: Electricity Generation Costs in Comparison
Source: Solar Power Europe; 2017 [67]
Figure 35 gives a good idea of the cost of PV in comparison with other means of power
generation. The PV market is growing at a fast pace worldwide evidenced by Figure 36
below. With declining costs for PV and rising costs for thermal power generation, this
development is likely to continue.
64
Figure 36: World Annual Solar PV Market Scenarios 2017 - 2021
Source: Solar Power Europe; 2017 [67]
The conclusion of the Global Market Outlook 2017 for solar power sums up a bright future for
PV power plants:
“The global market outlook for solar power is bright. Before now, solar power was not as
competitive as it is today. Utility-scale solar is cheaper than new fossil fuel plants and nuclear
power generation plants in most regions of the world today. If retail electricity is not
subsidised, it is usually more economic to produce solar on your rooftop and consume the
clean power in-house. The costs for solar power continue to decrease, making this
technology attractive for many users and investors around the world.”
Key requirements for successful implementation and 4.2operation of PV plants
For a PV project to be successful, three crucial areas can be identified:
1. Optimum power plant design:
A key challenge is to design a PV power plant that is optimally balanced in terms of
cost and performance for a specific site or circumstance.
2. Project implementation:
Achieving project completion on time and within budget with a power plant that
operates efficiently and reliably, and generates the expected energy and revenue, is
another key requirement. Key aspects of project implementation include: permits and
licensing, selection and contracting of the engineering, procurement and construction
(EPC) company, power plant construction, and operations and maintenance (O&M).
65
3. Commercial and financing aspects:
PV regulatory frameworks and specific types of incentives/support mechanisms for the
development of PV projects, such as preferential tariffs and other direct and indirect
financial supports, have a paramount impact on the financial viability of PV projects, as
they affect the revenue stream. Power Purchase Agreements (PPAs) specify the terms
under which the off-taker purchases the power produced by the PV plant; this is the
most important document to obtain financing.
Optimum Power Plant and Project Design 4.2.1
PV plant design is developed initially as part of a pre-feasibility study which is based on
preliminary energy resource and yield estimates, as well as other site-specific requirements
and constraints. The plant design is further improved during the feasibility study, which
considers site measurements, site topography, and environmental and social considerations.
Key design features include the type of PV module used, tilting angle, mounting and tracking
systems, inverters, and module arrangement. Optimization of plant design involves
considerations such as shading, performance degradation, and trade-offs between increased
investment (e.g. for tracking) and energy yield. Usually, the feasibility study also develops
design specifications on which the equipment to be procured is based.
Solar energy resource depends on solar irradiation of the geographic location as well as local
issues like shading. Initially, solar resource assessment can be done based on satellite data
or other sources, but as the project development moves progresses, ground-based
measurements are desirable to provide an increased level of confidence.
Energy yield is a critical parameter that determines (along with the capital costs and the tariff)
the financial viability of the project. Probability-based energy yield (for example P50, P75,
P90) are modelled over the operating life of the project. A thorough analysis of the solar
resource and projected energy yield are critical inputs for the financial analysis.
Site selection is based on many considerations, such as whether the PV plant is close to the
grid, and whether the process for obtaining a grid connection agreement is transparent and
predictable. Close cooperation with the grid company is essential in obtaining a grid
connection agreement. The agreement, as well as applicable regulations, should clearly
state the conditions of the PV developer’s access to the grid, and provide the guidelines for
design, ownership, and operation of the grid connection. Access to land is also a basic
requirement for project development. Project land must be purchased or leased for longer
than the debt coverage period; a minimum of 15-20 years is desirable, although a 40-50-year
lease is often signed and advantageous. In addition to the project site, the developer needs
to secure access to the land over which the grid connection will be laid out.
Project Implementation 4.2.2
For a PV power plant that operates efficiently and reliably, generating the expected volumes
of energy and revenue, the objective of the project implementation process must be to
complete the project on schedule and within the allocated budget. To achieve this objective;
several key activities need to be completed successfully. Permits and licensing are often a
very bureaucratic process involving multiple agencies in the central and local governments
which may not coordinate their procedures and requirements. The list of permits/agreements
needed is usually very long and differs from one country to the other.
66
Typically, at least the following are needed:
1. Land lease Agreement;
2. Site access permit;
3. Building permits;
4. Environmental permit;
5. Grid connection agreement; and
6. Operator/generation license. Understanding the requirements and the local context is
essential.
Consultations with the relevant authorities, the local community, and stakeholders are also
important for a smooth approval process. Environmental and social assessments should be
performed early in the project planning process and actions should be taken to mitigate
potential adverse impacts. The grid connection agreement is critical to ensure that the PV
plant can evacuate the power generated to the grid.
Engineering, procurement and construction can be broken into multiple contracts, but care
must be taken to spell out the responsibilities, so that all parties are clear on who is
managing various risks and the overall process. In some cases, overall coordination will be
performed by the PV plant owner (if it has the in-house engineering expertise and experience
in similar projects) or by an engineering company that is hired as a management contractor
acting on behalf of the owner. However, the most common approach in building PV plants is
turn-key responsibility through an EPC contract. An EPC contract involves one organization
(the EPC Contractor) who has full responsibility to complete the project on schedule, under
budget, and within the specified performance. The EPC contactor is paid a higher fee in
return for managing and taking responsibility for all the risks of the project.
Operation and Maintenance (O&M) of PV plants can be performed by the owner or by
contractors. Regular maintenance (including cleaning of the PV modules) is relatively easy
and can be done by local staff trained by the equipment suppliers. Monitoring of plant
performance can be achieved remotely by the original equipment manufacturer (OEM) or
another asset manager. Spare parts, both for plant inventory and in response to equipment
failures, need to be purchased from the OEM or an alternative supplier. There are companies
offering lease agreements including leasing the PV plant or installing the PV plant and paying
the owner of the building a rental. Under such agreements, electricity may be sold to the
building owner at below-market prices.
Commercial and Financing Aspects 4.2.3
Activities related to project financing run in parallel with the project design and permitting. As
the project developer initiates preparatory activities including securing land lease agreement
and permits, preliminary financing schemes are also assessed. Adequate funds should be
allocated to complete the initial stages of project development, most importantly for the
energy resource assessment, site selection, land lease agreement, and preliminary
permits/licenses.
Depending on the financing requirements of the project and how much of their own equity the
developer can commit to the project, the developer may seek another sponsor. It is not
unusual for the initial project developer to sell part or all rights of the project to sponsor -
often with access to greater technical expertise and financial resources - who will complete
the project.
As the project progresses, the developer/sponsor will reach out to potential debt financiers to
get an idea of current lending rates, requirements and terms, and as the project develops,
67
they will undergo due diligence. The experience and creditworthiness of the sponsor is
critical for achieving financial closure and obtaining attractive financing.
Power projects are typically financed on a “back-to-back” basis, meaning that all contracts
eventually rely on a bankable PPA. In other words, a PPA with a creditworthy off-taker
covering adequately all the key risks of the project provides a sound basis for the
project developer to sign EPC and O&M contracts, lease or purchase land, etc., so the
project can be implemented. As the project takes shape, the developer begins negotiations
with the off-taker (often but not always a state-owned utility in most emerging economies) on
the price, duration, and terms of the PPA. In many markets, PV projects have benefitted from
regulatory support providing above-market price for power. For example, under a Feed-in
Tariff (FiT) program, the price of electricity from renewable energy is specified for a set
period, usually 10–25 years. In another example, terms of the PPA may be pre-determined
through a tender process in which the developer is submitting a competitive bid (e.g., reverse
auction). In a third example, utilities may have an obligation to source a portion of their total
energy from renewable sources, and then negotiate with developers according to their own
priorities and parameters. In the (relatively rare) instance of a merchant solar power plant,
power will be sold in the open market (i.e., “day-ahead,” “hour-ahead” markets) at fluctuating
rates rather than at a pre-determined tariff. However, in the future (if PV prices continue to
decline) regulatory support may not be needed and merchant PV plants may become more
common. The type of grid connection and way of dispatching need to be clarified in the PPA.
In most countries, the regulation requires the grid operator to take all the electricity produced
by renewable facilities (“obligation to take”), but curtailment rules need to be included clearly
in the PPA.
PV Potential 4.3
Nigeria’s close proximity to the equator exposes it to significant levels of solar radiation
giving Nigerian solar businesses great potential to thrive.
The country’s current electrification rate is only 59% and energy demand is expected to grow
steadily due to a rapidly growing population and economy. These trends will cause Nigeria to
face challenges in keeping with demand in the power sector. Solar PV power plants can play
a major role in solving the frequent transmission failures of the grid that Nigeria faces. The
sinking costs for PV systems are helping to make the technology more accessible and viable.
The Nigerian government has taken significant steps to improve the standards of regulations
for solar power projects. NERC has set a target of generating a minimum of 2,000 MW of
electricity from solar PV by the year 2020 and seeks to ensure the following frameworks are
fulfilled for solar power companies:
Guaranteed price & access to grid
Feed-In – Tariff for Solar, Wind, Biomass & Small Hydro
Power Purchase Agreement (PPA) based on plant life cycle of 20 years
Electricity distribution companies (DisCos) to procure minimum of 1000 MW
(50 per cent of the total projected renewable sourced electricity)
Nigerian Bulk Electricity Trading Company (NBET) to procure minimum of 1000 MW
(50 per cent of the total projected renewable sourced electricity) [69]
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If the Federal Government continues to improvement regulatory environment, there is a
strong possibility of growth for solar PV businesses in Nigeria. Foreign companies and
investors interested in the potential that the sun has to increase electrification rates in
Nigeria, should explore the Nigerian market in partnership with a local company.
Risk factors 4.4
The main risk factors for solar PV in Nigeria can be divided into socio-political, geographical
and financial risks.
Financial risk factors 4.4.1
A major financial risk that investors in PV systems face is initial funding. The reluctance of
local commercial banks to grant investors loans has significantly impeded the growth of the
solar PV sector because the high upfront cost of solar PV systems has traditionally been
difficult for individual households to cover.
Capital costs for solar PV systems have fallen in recent years and yet they remain relatively
high in Nigeria, because of poor infrastructure and a lack of trained personnel. Given the high
commercial bank rates, solar project financing has largely been led by foreign investors
because of the high interest rates and strict guarantee requirements [70]. Commercial bank
rates range between 23% and 29% whereas rates from the Central Bank of Nigeria were
11% per annum in 2016. Nigeria’s Bank of Industry announced its intention to offer loans at a
rate of 7%.
The cost of solar PV systems in Nigeria is further impacted by Nigeria’s vulnerability to
currency devaluations as companies have to utilise foreign currencies to procure solar
components and technical talent. The cost is further impacted by environmental and security
hazards because capital items become more expensive as more repairs and replacements
are necessary.
Socio-political/geographical risk factors 4.4.2
Technical barriers in Nigeria also have an impact on the feasibility of solar PV businesses.
These include scarcity of skilled personnel and lack of training facilities. Nigeria also lacks a
stable institutional and regulatory framework that can drive solar energy profitability. Given
the lack of clarity and stability in the past, risks may also come in the form of sudden policy
changes which may affect the profitability of projects.
Poor transmission infrastructure and an unreliable network system are also major risks to the
success of solar PV in Nigeria. The existing power grid cannot accommodate the estimated
6,000 MW of power that is generated due to obsolete substation equipment, high technical
and non- technical losses, and service providers’ inability to effectively evacuate power
generated by the generation companies (GenCos). These factors are constraining utility
scale solar PV in Nigeria.
A pivotal risk in the solar PV business in Nigeria are natural disasters, such as heavy winds
and heavy rainfall that may lead to corrosive damage of panels and appliances. Insecurity
and vandalism are also major factors of risk in Nigeria. Theft of solar panels and batteries is
a major concern for solar companies. Ongoing security concerns about terrorism in the north
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east of the country are also impeding growth, particularly because the north east has the
highest solar radiation levels.
Recommendations for Investors and EPCs 4.5
The following is a list of risks that investors and EPCs should be aware of and address to
help promote the further development and successful implementation of PV projects in
Nigeria:
Completion risks affected by permitting/licensing and construction delays.
Energy yield: how much energy a facility produces depends on the energy resource and the design of the PV plant - changing weather patterns and performance degradation of the PV plant can significantly affect the revenue of projects in Nigeria.
Regulatory environment: changes in regard to the amount of power the off-taker is obliged to purchase and the power price paid can impact projects, especially when they are applied retroactively. Developers are advised to consider the viability of their projects without subsidies or special treatment; particularly if these considerations show that the effective price of the generated solar power is well above the levelized cost of power in the existing power market.
Off-taker creditworthiness: thorough due diligence of the off-taker is an essential step before finalizing financing. The appropriate financing arrangement depends on the specifics of each PV project, including investor risk appetite. The most common arrangement for these projects is to use a project finance type arrangement, typically with at least 30 percent equity and the remainder as debt. However, if local commercial debt is difficult to access or expensive, or the due diligence process for obtaining debt is expected to slow down a project and tariffs are sufficiently high, then equity investors may be incentivized to back the entire project. While debt is cheaper than equity, all equity financing can allow for speedier project development, a priority in markets where a specified amount of construction must be achieved by a certain deadline to be eligible for incentives. This dynamic is not unique to solar, but as most solar projects have historically been smaller, it has been more feasible for developers to finance them without debt financing, or at least to delay debt financing until the projects were operational and thus presented a significantly lower risk profile to lenders. For solar projects that are among the first in their market, local banks may be reluctant to lend until they have evidence of successful realisations; in such circumstances, seeking financing from development finance institutions like the IFC, which is willing to be a first-mover in new markets for renewables, may be a solution.
Investors who consider the abovementioned risks and adopt suitable mitigating measures as early as possible will be enabled to have high success rates with their PV projects.
70
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3. Selected PV Business Models
[64] eclareon GmbH; 2017. Berlin, Germany
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Determination of the Cost of Electricity Generation for the Period 1 June 2012 to 31 May
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